Matalan holds too few treats in store

St James's Place looks cheap; NetStore needs room to manoeuvre; Yorkshire Group's an interesting risk
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The Independent Online

Paul Mason, the new chief executive of Matalan, gave a bullish presentation about the discount retailer's prospects yesterday, though the task confronting him is far greater than he must have imagined when he accepted the job.

The revelation in the past few weeks that the company had been conned out of £1m by an errant supplier has raised serious questions about the company's systems. Quite why it took the company so long to realise it was being charged twice for the same goods is anyone's guess.

But the priority now is to put those creaking systems right, at a cost of £25m over the next three years. It may prove a blessing in disguise. New systems will help the company adopt a more customer friendly approach which will replenish popular lines in stores rather than simply pumping out merchandise from the centre.

Mr Mason, who joined from Asda, had lots of ideas yesterday though few of them broke new ground. There will be better car parks, bigger entrances, "greeters" at the doors (an Asda trick) and improved lay-outs. Advertising spending will be used more wisely with more use of the group's huge database of over 8 million customers.

Together with a big store opening programme, this will help drive top line growth. But costs will rise as the company adds extra staff in stores after already adding expensive additions to its board. The introduction of a new IT system carries with it risks, too.

And then there are the competitive threats. Asda seems to be gunning for its ex-employee with yet more price cuts at its George fashion label. And the recovery of Arcadia and Marks & Spencer means fewer soft targets to aim at.

The shares jumped 7 per cent to 376.75p yesterday on the 30 per cent profits jump and better than expected like for like sales growth of 7.2 per cent in current trading. Assuming current year profits of £127.5m the shares trade on a forward price earnings multiple of 17. About right for now.

St James's Place looks cheap

Britain's super-rich are still sitting on piles of cash, never mind the global economic slowdown. That has caused problems for wealth management groups such as St James's Place Capital, which are struggling to lure that lolly into any of its investment products.

New business sales in the first quarter fell 19 per cent year-on-year, with sales of investment products down 26 per cent at £21m and pension sales off 12 per cent at £13.8m.

For a small player in asset management, which cannot quickly adjust its costbase, a steep fall in income puts immediate downward pressure on profits. Hence the company's shares closed down 12 per cent at 232.5p. ING Financial Markets now expects pre-tax profits of £97m this year, rising to £111m in 2003.

At least assets under management ended the first quarter up an impressive 18 per cent at £6.7bn. The question is when that investment performance will tempt wealthy clients back into the savings market. If St James is finding it this hard when interest rates are at rock bottom, things may well only get harder.

Mike Wilson, the chief executive, says the turnaround is only a matter of time. Indeed, he is sticking to his goal of increasing the 1,100-strong salesforce, and its productivity, by between 5 and 10 per cent annually.

The shares command a forward multiple of 15, putting them on a discount to the wider market. Assuming St James can before long convert its own investment performance into new business, the rating is too cheap. Buy.

NetStore needs room to manoeuvre

There were a lot of business mistakes made in April 2000, when the tech bubble was at its most swollen. One of them was floating a company predicated on the belief that small businesses would prefer to rent their software, by downloading it from the internet, instead of buying it outright.

One maker of this sort of software, a so-called application service provider, is NetStore. Floated at 150p, its shares were trading yesterday at 18.25p, and there seems little prospect of major growth for some time to come.

The management has proved fleet of foot in turning the business model on its head. It is now focusing on larger businesses, which have been keener to adopt the ASP model, and is building scale through a number of acquisitions (with the promise of more to come).

It has also slashed costs and built a gross margin of 42 per cent in the three months to 31 March compared to just 35 per cent in the previous quarter and 37 per cent in the same period last year. The figure should rise above 50 per cent in the short term.

The pre-tax loss of £1.3m compares to £4.4m the year before and NetStore is closing in on a cash positive position. But that will only be half the battle. Under pressure from customers to keep its cash reserves high, the group has very little room for manoeuvre and real earnings per share remain too far distant to forecast.

Despite the progress made, the stock is still too risky.

Yorkshire Group's an interesting risk

Yorkshire Group is one of the stock market's oldest companies, and yesterday had its 102nd annual shareholder meeting. It is also a basket case of a company. Based in Leeds, the firm makes dyestuffs, particularly for the textile industry.

But what textile industry? Clothing manufacture has shifted en masse to the Far East and Yorkshire has always seemed a handful of steps behind these structural changes. The global slowdown pushed the group to a loss last year and the dividend is a distant memory.

At least the company is bulking up its Asia Pacific presence, following a giant acquisition in 1999, while restructuring the European units to focus on niche customers, such as carmakers. It is closing one of its two Leeds factories this year and opening a sales office in Taiwan.

There has been a wholesale management clear-out so, with a fair wind, the new team could make headway this year. And there is a chance that the wind is turning fair enough. Yesterday's AGM statement said trading conditions have stabilised after a grim end to 2001, and may even have improved since Easter.

Restructuring plays are only ever for brave investors and, with Yorkshire's debts at £35m and its broker forecasting two more years in the red, the shares, at 42.5p, are high risk. But this looks interesting.

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