Investment Column: Squeeze is on for Somerfield

It has been a strange year for Somerfield. Following its difficult flotation in August 1996 when the issue price had to be cut twice, the group's shares spent most of last year trading virtually in line with the market. This was in spite of the fact that it floated on a forward earnings multiple of five and with a yield of 10 per cent. Then in the last month the shares have soared from around 190p to a high of 251 last week.

This was either bid speculation - with the group being identified as a potential merger target in a sector keen on consolidation - or a catch- up process as Somerfield shares had missed out on much of the upgrading in supermarket ratings since the summer.

Whatever prompted the buying spree, it certainly cannot be trading. Somerfield did well to report a 12 per cent increase in underlying profits to pounds 56.9m in the six months to 8 November. But the problem is that the growth all seems to be coming from widening margins. Like-for-like sales growth in the period was just 0.3 per cent and current trading is not much better at 0.6 per cent.

Given that the company said in the summer that its target was sales growth above the industry average this is an under-achievement. Tesco, for example, reported like-for-like growth of 6.5 per cent on Monday against an industry average of 3.3 per cent. With sales virtually stagnant, Somerfield is having to rely on squeezing suppliers to drive margins. They rose from 3.4 per cent to 3.8 per cent on the year.

Management is talking about improving sales with better product availability, refit programmes and an improved product mix. With costs on the up and the tax charge rising, however, this may not be enough. There is some scope to improve the store portfolio with refits but the large sales increases have already been achieved.

A merger is always a possibility though it is difficult to see any of the big UK supermarkets paying 300p a share for a company that was offered to them for 160p by Kleinwort Benson just before the flotation. Assuming full-year profits of pounds 115m, the shares, up 4p to 241.5p yesterday, trade on a forward p/e ratio of 8 and yield almost 5 per cent. Still a substantial discount to the sector but, given the recent strong run, it may be time to lock in some profits.

Start your day with The Independent, sign up for daily news emails
News
Howard Marks who has been diagnosed with inoperable cancer aged 69
people
Arts and Entertainment
Benedict Cumberbatch has spoken about the lack of opportunities for black British actors in the UK
film
Voices
Winston Churchill, then prime minister, outside No 10 in June 1943
voicesA C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
News
Rowan Atkinson at the wheel of his McLaren F1 GTR sports car
people
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us