Relief at Dixons but risks remain

Sygen's all prepared to bring home the bacon; Still some interruption in SMG's transmission
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The Independent Online

The sigh of relief that blew through the City when Dixons released its latest sales figures yesterday added £170m to the electrical retailer's market value. Things are not as bad as feared. Sales are not falling, profits are rising. But it may turn out to be a small mercy.

In the 18 weeks to 6 September, the first of its financial year, sales at stores that have been open more than a year were up 1 per cent on the same time last year. The company's overseas operations - which include PC City shops in France and Spain, Elkjop in Scandinavia, and ElectroWorld in central Europe - are growing sales at 3 per cent, but the UK is flat.

Flat is okay, given that sales were running some 7 per cent down in the UK last time we heard from Dixons, but that was against a period last year when football fans were investing in big TVs on which to watch the World Cup. The heatwave did cause a dip in sales, but they have come back strongly since, with computers staging a notable recovery, along with digital cameras and camcorders.

The risk remains, though, that the UK consumer will cut back on such luxuries, as concerns over debt levels, future interest rate rises, tax increases and an upward tilt in unemployment conspire to bring the curtain down on our extraordinary spending spree.

Dixons is proceeding cautiously in Europe, but is yet to really prove itself overseas. The profitability boost boasted yesterday may be a one-off, the result of the overhaul prompted by January's profit warning. And overhanging everything, the Competition Commission's plans to reduce profits from the sale of extended warranties, due before Christmas.

We said sell Dixons shares last November and while they quickly lost half their value they have since rebounded strongly. This relief rally has again taken them to levels (13 times forecast earnings for the current year) which do not take account of the risks. Avoid.

Sygen's all prepared to bring home the bacon

Sygen International used to be called the Pig Improvement Company because, er, it improves pigs. It uses its 40 years experience in pig breeding to sell sows and boars which have been bred to resist disease, to produce bigger litters, to produce more and better quality meat, whatever.

And the group is fast growing its biotech operations, which use modern techniques such as gene testing to select pigs immune to e.coli, for instance. With a backlash against genetically modified foods, Sygen's expertise could provide farmers with the next best way of producing the superpig they desire. It has already moved into shrimp production (apparently shrimp is North America's number one agricultural import) and has just received a research grant to see if its biotechnology can improve poultry, too.

With the company moving into new species, it will become less dependent on the "pig cycle", where rock-bottom prices in the US hit Sygen's annual results, which were reported yesterday and sent the stock down 1.25p to 54.5p. Prices are picking up now, though, and supported by Sygen's cash cushion of £24m, it looks as if this stock will bring home the bacon. Buy.

Still some interruption in SMG's transmission

SMG, the former Scottish Media Group, has some great assets. Trouble is that it acquired several of them just before the recession hit the media industry three years ago.

Yesterday's interims proved it is still tough out there. Profits, before tax and one-offs, halved to £5.5m in the period to 30 June. SMG owns two ITV licences , the national radio station Virgin and advertising businesses including the cinema ads group Pearl & Dean.

The company points to signs of recovery in the advertising market, and SMG has also now put a series of company-specific problems behind it. Thanks to the £216m sale of its Herald regional newspapers, debt is significantly down from the threatening levels that led to the company requiring a refinancing. It has also fought and won a High Court case with Chris Evans, the DJ who sold Virgin Radio to SMG.

The increasing noise about an ad recovery, either apparent or just round the corner, should be treated very cautiously. However, there are signs of an upturn across SMG's business in August and September and even ITV ad income should be in positive territory in the fourth quarter of the year.

SMG is highly geared to the recovery. Given the high fixed-cost nature of the business, 80p in every extra pound now drops to the bottom line. The company's shares have had a good run in recent months, though the stock closed down 4.5p at 94.5p yesterday. That puts SMG on a forward multiple of 18 times. We cannot bank on an imminent advertising recovery, and debt is still high, so the stock is not worth chasing at this level.