Somerfield needs Kwik fix as it feels the heat

Serco looks a source of profit; Trouble seeing Heywood for the trees
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The Independent Online

It just doesn't get any better for Somerfield, the poor cousin of the supermarket sector, which revealed yesterday that sales have been falling again in the past few weeks.

Over the last seven weeks, like-for-like sales have slipped by 0.2 per cent across the group - despite the good weather which has tempted people into picnics and barbecues; despite the corporate distractions at its rivals, in particular Safeway; and despite all the efforts of John von Spreckelsen, executive chairman.

It gets worse when you look more closely. Sales at the group's Kwik Save chain were down 4.7 per cent. Mr von Spreckelsen blames a flurry of "special offers" this time last year which boosted sales at Kwik Save at the expense of profit margins and which meant there would always be a comparative decline this year. Fine. But unfortunately, margins at Kwik Save are only "stable" compared to last year, when you would have hoped they would have gone back up.

And then there is the core Somerfield chain, where sales growth is 3.2 per cent. That's actually a little ahead of expectations, but most of the gain is from one-off sales uplifts in stores given a makeover.

The company argues there will be further benefits from the refit programme at Somerfield (120 of the 591 stores have been redone so far) and it has identified a new format for the Kwik Save stores which it will roll out from December. It also plans to sub-let some space in a number of stores.

But market forecasts for the year already look in doubt. And with Sainsbury having decided not to seek clearance to acquire 171 smaller Somerfield stores, the entrepreneurs John Lovering and Bob Mackenzie (whose 120p-a-share bid was rejected in June) may not be able to make a new bid stack up.

With net assets estimated at 200p a share, Somerfield is no "sell", but until it finds how to unlock that value, it is unappealing to new share shoppers.

Serco looks a source of profit

Serco is going to play a big part in the Government's shake-up of the public sector. The company already provides a vast array of management services for the state - from decomissioning nuclear weapons and running observatories, to inspecting schools and providing IT support to the National Health Service. It is inching further and further into the public sector here and abroad, with new contracts to monitor traffic flows on the UK's motorway network or to control driving tests in Ontario, Canada. By the end of the year, it may even be part of a consortium building refuelling aircraft for the Royal Air Force.

It is a potentially vast market and, now that the crazy optimism of a few years ago has been tempered and Serco shares (up 18p to 188p) trade on a multiple of 18 times this year's forecast earnings, investors would be well advised to come along for the ride.

True, the party conference season is sure to see battles over public sector outsourcing but Kevin Beeston, Serco's chairman, professes to be unworried by this "noise". On a day-to-day level, he says, the company has excellent relations with all its public sector clients and the necessity to "deliver" on public services while the public finances deteriorate means more government outsourcing is inevitable.

The sheer length of such contracts mean all this year's forecast turnover is guaranteed, and so is 86 per cent of next year's. Buy.

Trouble seeing Heywood for the trees

Heywood Williams is one of the UK's biggest makers of PVC doors, windows and conservatory frames, but has never managed to make the profits expected from its share of a £1.3bn-a-year market. Just as it appeared to be clawing its way to respectable numbers this year, some inexplicable meltdown, a plunge into the red, the departure of a second chief executive and shareholders left bewildered and out of pocket. What happened?

If there is a clear answer, the chairman, Hamish Bryce, couldn't really pin it down yesterday. There are problems in the US division because trailer park homes aren't selling well. Its double glazing acquisition Coldseal was a disaster (door-to-door salesmen never really got the public company ethos, apparently) and has now been sold. And the main division making PVC frames suffered cost over-runs and "supply issues".

Mr Bryce has rolled up his sleeves and promised an overhaul, but there is a lot of work to do. Heywood is paying its 15p interim dividend out of disposal proceeds and the 11 per cent yield suggests the payout will have to be cut. More pain seems inevitable before Mr Bryce proves he can ever deliver. With no sign of meaningful earnings, the shares, up 3p to 140.5p, are best avoided.

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