Bid is best hope for House of Fraser

Promise of another record year makes Domino worth holding; Touchstone built on strong foundation
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The Independent Online

House of Fraser is the department store group which saw off a £197m bid approach from Tom Hunter earlier this year and must now prove it was right to turn him down. Yesterday's trading statement hardly set the blood racing, though, and it is open to question whether Mr Hunter will return south from his Ayrshire lair with a fresh bid in a few months time.

In the first 20 weeks of the House of Fraser's financial year, like-for-like sales were up by just 0.6 per cent on last year, with strong sales in beauty and fashion accessories making up for a weak womenswear performance.

Gross margins rose by a meagre 0.1 of a percentage point, underlying the difficulty this company seems to have in growing sales and margins at the same time. Also, the company is making a provision of £3.8m to cover a likely VAT charge on debit and credit card handling fees after Debenhams lost a battle with Customs & Excise.

The best bit of news was the cost savings with more cuts being identified over and above the £11.5m previously identified for the current year.

These are coming in both stores and head office but are certainly no substitute for genuine growth. To be fair on House of Fraser, the high-street trading environment has become tougher.

We have seen both New Look and Matalan report falls in like for like sales while Marks & Spencer's sales are also thought to have slowed. By way of response House of Fraser is concentrating on cost and stock control. There should also be some growth to come with a new store opening in the City of London in September and outlets in Dublin and Croydon due to be opened next year.

Analysts have kept their full year profit forecasts at £28m for the department store operator whose chain of 48 stores includes names like Dickens & Jones and Army & Navy checked. With the shares up 2p at 89p yesterday this puts the stock on a forward p/e of 11. This is not particularly cheap on fundamentals but with both Mr Hunter and Baugur, the Icelandic retailer, holding substantial stakes it is worth holding on for a bid.

Promise of another record year makes Domino worth holding

Look at a Coke can closely enough and you'll see there are precise details of when and at what time it was filled as well as the best before date.

Domino Printing Sciences designs, makes and sells the printing machines that print this kind of data on to all sorts of products from the food and beverages industries to the pharmaceutical giants.

Domino Printing Sciences' client base includes Unilever, Nestle, Coca Cola, Glaxo and Pfizer and against a backdrop of tough conditions generally, the business has put in a solid performance. Pretax profits in the six months to 30 April rose 30 per cent to £7.8m on sales which were up 6 per cent at £79.5m.

It is having a particularly tough time in France and Germany, which make up around 12 per cent of sales, although its business in Asia, which accounts for about a quarter of turnover, is going great guns. Encouragingly, there has also been some recovery in the US market, which accounts for about a third of turnover.

Domino reckons this is a growth market thanks to new legislation as well as a push, particularly from the tobacco industry, to make sure products can't easily be copied.

The company also has fairly decent visibility since around half of its sales come from "aftermarket products" like printer fluids and spares. The balance comes from selling kit to customers where lead times are quite short but investors should take comfort from its promise of generating record sales this year.

Analysts are forecasting profits of around £18.5m for the year, translating to earnings of 12p a share - putting the stock on a forward rating of nearly 15 times. This column recommended buying the shares at 144p a time in January. With the promise of another record year in store, the stock should be held.

Touchstone built on strong foundation

The IT services firm Touchstone is, like its rivals, suffering from the general slowdown that is causing customers to take longer to make decisions on having new systems installed. It sells mainly accounting software and services to a host of businesses ranging from the London Stock Exchange to JD Wetherspoon.

A recent profit warning meant there were few surprises in yesterday's figures. Pretax profits fell slightly in the year to 31 March to £1.5m while sales were more or less flat at £14.2m and life is not likely to get any easier this year.

But Touchstone has several things going for it. Unusually for a small technology company, it pays a dividend and also has some £3.7m of cash in the bank. Furthermore, nearly 40 per cent of sales are recurring in the form of maintenance contracts which gives it a fair degree of visibility going forward. Analysts are forecasting Touchstone's sales to be flat again this year but reckon profits will rise slightly to £1.9m, or about 13.3p a share. That puts the shares on a forward rating of seven times.

The strategy is not risk free but even factoring in the recent rally in the shares and the tough market conditions, the rating does not seem demanding. Buy.

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