Investment: Somerfield keeps the City doubters at bay

SOMERFIELD, the supermarket group which merged with Kwik Save last year, said yesterday that the integration of the Kwik Save stores was on track and sales in its Somerfield outlets were encouraging.

Reporting doubled profits before exceptional items to pounds 113.8m in the six months to November, the company said it had started the conversion of the Kwik Save stores to the Somerfield format. It is also expanding its petrol forecourt deal with Elf to open up to 50 more stores over the next 18 months, creating 1,500 new jobs.

Somerfield, which walked away from a merger with the Booker cash and carry chain in September, said a Booker deal was no longer part of its plans. "It's not on our radar screens," said David Simons, chief executive. However, he refused to rule out a possible deal at a later stage.

It is deals that have transformed the Somerfield share price since its troubled launch on the stock market in August 1996. The shares soared on the back of the Kwik Save merger as the market warmed to the potential cost savings and buying efficiencies.

Though the City has been sceptical about the company's ability to grow sales and keep pace with industry leaders such as Tesco and Asda, US investors, in particular, have concentrated instead on the company's strong cash generation. US investors now account for more than a third of Somerfield's equity.

Yesterday's figures kept the doubters at bay once again, though like- for-like sales have slowed and the Kwik Save stores are being run for cash. Like-for-like sales at the Somerfield fascia were up by 3.4 per cent in the half, but this has slowed to 1.7 per cent in the eight weeks over Christmas.

At Kwik Save sales are down by 3.1 per cent on a same-store basis. However, the company said it would stop reporting like-for-like sales for the chain as they are no longer a prime consideration. It will concentrate instead on squeezing profits higher ahead of their ultimate conversion to Somerfield.

Ten of the Kwik Save outlets have been converted to the Somerfield format with a further 53 to change over the next four months. The Kwik Save head office in Prestatyn has been closed with only 100 of the 800 workers being offered jobs at Somerfield's Bristol headquarters.

The Food Giant stores have already been converted to the Kwik Save format. But though Mr Simons and his team insist the number of store closures will remain at 130, analysts believe the final number will be higher and that other under-performers will be closed.

The management task of integrating nearly 900 Kwik Saves with Somerfield's own 472-strong portfolio should not be under-estimated, though management has done well so far.

On full-year forecasts of pounds 221m the shares - up 5.5p to 431.5p yesterday - trade on a forward rating of 13. Though the company has its supporters, Paul Smiddy at Credit Lyonnais Laing is not impressed. "You could buy Safeway shares at the same price with less risk," he says.