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Kingfisher's rights issue appears a decent bet

Jardine Lloyd is worth holding; SFI looks cheap, but don't tuck in yet

Stephen Foley
Wednesday 31 July 2002 00:00 BST
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It is make your mind up time for shareholders in Kingfisher, the retail group which includes B&Q and Comet. The company's £2bn rights issue to fund the £3.2bn buyout of the Castorama DIY business in France closes on Friday.

It is by no means an easy call. At 155p, the rights issue was originally priced at a discount of 50 per cent to the Kingfisher share price. But the plunge in markets has eroded much of the difference; the discount is now just 16 per cent.

There are several arguments in favour of subscribing. First, the shares now trade on a very low multiple of earnings (10) and have a good dividend yield (5 per cent). This seems good value for a DIY Goliath with market-leading positions in both the UK and France.

Second, Kingfisher has a respected new chairman in Francis Mackay who is reshaping the management and guiding the streamlining of this group, which will see the demerger of its electricals business early next year.

And third, there is always the prospect of a bid from a US rivals such as Home Depot.

If these were all the arguments, then taking up the issue would be a no-brainer. Sadly there is quite a bear case too. Kingfisher is still looking for a chief executive to replace industry veteran Sir Geoff Mulcahy, so shareholders are betting on the chairman finding the right man.

The Castorama deal could also turn sour. It has already been an uphill struggle to win control. The French middle management could make it difficult for Kingfisher to achieve the needed cost cuts. If £112m of savings are not achieved in two years, the deal will have damaged Kingfisher's earnings per share. The price already looks expensive due to the stock market collapse since the offer was made.

The market appears to have swallowed the bear case whole, which is why the share price is where it is. But it is not likely absolutely everything will go wrong. Over the medium turn, subscribing for more Kingfisher shares at 155p looks a decent bet.

Jardine Lloyd is worth holding

When this column tipped Jardine Lloyd Thompson, the insurance broker, a year ago, the insurance market was already enjoying a period of reduced competitive pressures and underwriting capacity that was feeding into higher premiums. Since then, after 11 September, this trend has been hugely accelerated. So it was with confidence that JLT's chief executive, Steve McGill, was able to predict firm premiums well into next year.

That is good news for JLT not because it pockets the premiums (it doesn't) but because its clients – blue-chip companies, usually – need to search that bit harder to get a decent insurance package together, which is what JLT is expert at brokering. In the first half of the year, the company made profits of £53.2m, up from £39.4m, and analysts were forced to increase their forecasts for the rest of the year.

There was a little disappointment over revenues from the other side of the business, which administers company pension schemes and advises on corporate pension strategy. But a new deal to take over the Prudential's staff scheme will kick in within months. And the consultancy work should keep flowing, since new accounting measures and demands for cost savings are forcing companies to consider switching from defined benefit to defined contribution schemes.

JLT shares, up 12p to 636.5p, trade on 18 times this year's earnings, which is historically high, but the chance it will continue to beat forecasts makes the stock worth holding.

SFI looks cheap, but don't tuck in yet

It is a year of upheaval for the high street bars group SFI. No sooner had its finance director unnerved the market by leaving to head up a rival restaurant group, than its founder Tony Hill announced he was stepping back as executive chairman ahead of plans to quit the trade next year.

With a new management team in place, still the changes are coming thick and fast. Yesterday, the group, which owns the Slug and Lettuce and Litten Tree chains, said it would tackle its high debts. Having splashed out on 46 new bars last year, it will open just 12 in 2003. This, it hopes, will allow it to cut gearing to a manageable 100 per cent from 121 per cent during the next year.

Trading across the group's 186-strong estate has been good, with the exception of its Latin-themed Fiesta Havana sites. SFI benefits from the strength of its brands and its position in a growing area of licensed retailing – the high street. Although at £20m, pre-tax profits for the year to end-May have continued the group's earnings track record, future growth will be muted while SFI retrenches.

While the shares, down 6.5p to 178.5p, look inexpensive there could still be a better time to buy.

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