Kesa Electricals has quite enough spark for now

Harvey Nash is high enough; ARM Holdings reaping dividends
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The Independent Online

The sparks were hardly flying at Kesa Electricals over Christmas. The retailer, one of the last to report how its festive sales fared, is well and truly plugged in to the state of the French economy, owning two of the country's top electricals and furniture chains.

Sales at Darty and BUT were a distinctly low voltage affair during the period from 2 November to 3 January. Darty particularly disappointed the City by barely breaking into positive like-for-like sales territory with its 0.3 per cent rise. This was a sharp slowdown from the 4.7 per cent spurt seen during the third quarter, showing just how weather-driven that was as even cash-strapped French shoppers splashed out on electronic ways to keep their cool. Meanwhile BUT's underlying sales decline of 0.2 per cent showed the retailer is still lacking a degree of French polish, albeit that the number could have been worse.

Closer to home, strong demand for all things digital, not to mention a stronger stomach for racking up big credit card bills, meant that Kesa's Comet chain fared better. Like-for-like sales during the two-month stretch accelerated, rising by 3.9 per cent. As is Comet's want, this figure excludes its sales of extended warranties, the lucrative insurance polices it tries to convince customers to buy with their goods. At least its sales of extended warranties have stabilised, even if they are no longer the easy money making machine they were.

Kesa's shares have flown since the group was demerged from Kingfisher in the summer, vindicating this column's advice that existing inventors should hang on to the stock. The group's prospects from here depend largely on when French shoppers decide they are ready to start spending again. Kesa derives four-fifths of its retail profits from the Continent, where it also owns Vanden Borre in Belgium. Kesa said yesterday that its full-year results would meet market expectations but the City needs more than that to re-rate the shares, down 6.5p at 253.5p. On a price/earnings ratio of 12.5 times, the stock looks fully valued for now.

Harvey Nash is high enough

The global economic upturn has meant that companies are getting back the confidence to spend again on infrastructure and technology projects. Technology and software companies are starting to report improved results.

That is good news for Harvey Nash, the staffing company that specialises in IT. A trading update from the company yesterday said that things were going even better than thought. Underlying results for the year ended 31 January "are expected to be well ahead of current market consensus estimates". The main point is that the year will be profitable (£1m according to Evolution Beeson Gregory), unlike the previous two years.

Improving levels of activity in the UK and US in the last quarter of the year is the reason for the upgrade. Continental Europe is flat. "This positive momentum has continued into the new year," Harvey Nash said.

Better trading has been accompanied with a $2.6m acquisition, announced earlier this month, of SBS, a business in the US, which will double the company's operations there.

Harvey Nash operates from the board level down and also works in non-IT sectors such as accounting. Interestingly, it also provides offshore outsourcing services with its operation in Vietnam providing IT programming.

A glance at Harvey Nash's share price, with the stock more than doubling in the past few months, shows that pretty much all the positive news is in the price. At yesterday's 104.5p close, it is trading at nearly 40 times profits forecast for the year ended January 2005. That's high enough.

ARM Holdings reaping dividends

Shares in ARM Holdings, the microchip company, short circuited yesterday despite the announcement that it would pay its first ever dividend - while leaving enough in the bank to fund strategic takeovers.

ARM shares were down 5.8 per cent even though its annual results showed its net cash generation for 2003 running at £29.5m compared with £25.8m in 2002. This gave a closing cash balance of £159.8m. Yes, the company that generates 90 per cent of its revenues in the US, was hit badly by the dollar weakness, contributing to a fall in pre-tax profits to £28.4m from £45.4m. But the company's vital signs are good.

Apart from increasing demand for its microprocessors and improving operating margins, the company's cash position should be a cause for celebration. It embarked on a progressive dividend policy yesterday starting with a 0.6p per share payout. But it still had the firepower to announce the acquisition of Triscend Corporation, which will help ARM secure its position in a new generation of microcontrollers.

"There is huge growth potential in this company," said Warren East, the chief executive. Certainly against the backdrop of stronger anticipated technology spending and increasing demand for microchips Mr East's optimism seems justified.

Arm shares have rallied since March. But this is a long term story and selling the stock now may well look very premature in 5-10 years. A forward price earnings ratio of 46 should not deter the determined investor. Buy.