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Revamped Storehouse good value

The Investment Column
There are two sharply divergent schools of thought on Storehouse and which one you adhere to will determine whether you think the company's share price slump over the past year is wholly justified or one of the biggest valuation anomalies on the market. Having tumbled from 361p in April to yesterday's close of 275.5p, up 6p, Storehouse has been one of the worst performers in recent months.

That seems a harsh assessment of a company that has grown underlying profits from pounds 16m in 1992 to an estimated pounds 126m this year and pounds 145m next time. On the face of it Keith Edelman, former managing director of Carlton, has done a tremendous job since joining Terence Conran's retail rag-bag three years ago, cutting costs, freshening up the appearance of a tired bunch of high street has-beens and sharpening buying and merchandising.

The trouble, according to the bearish camp, is that Storehouse has grown profits without any improvement to the top sales line. That matters for two reasons. First, margin improvements from good housekeeping are finite - without pushing bigger volumes, profits growth will falter. It has also triggered scepticism about accounting policies that have allowed that apparent magic.

Half-year figures yesterday confirmed the group's difficulty in pushing sales in its remaining Bhs and Mothercare stores (it sold Blazer recently). Same store growth of 3 per cent at Bhs and a fall of 2 per cent from Mothercare shops showed how dependent Storehouse is on making a success of deals such as the recent acquisition of Childrens World.

Against that background, increasing underlying profit before exceptional items (the pounds 20.5m one-off cost of integrating Childrens World) by 13 per cent to pounds 37.5m was once again impressive. Sales were up 14 per cent, half of that like for like, driven by another strong performance from the rapidly growing overseas franchise arm. The interim dividend rose a tenth to 3.3p.

Bulls of Storehouse argue that criticisms of Storehouse's management are without foundation and amount to little more than a decision by some analysts that they don't like the company. They also dismiss the accounting worries as scaremongering and suggest the recent price fall has made the stock one of the best value in the sector.

On the basis of pre-tax profits this year of pounds 126m, the shares stand on a prospective price/earnings ratio of 13.5, falling to under 12 the following year if Storehouse makes pounds 145m. That represents a sizeable discount to the market as a whole compared to the premium of up to 20 per cent that the rest of the retail sector is enjoying during the current consumer boom. This does seem to be an anomaly and the shares are good value.

Waddington wraps up profits

Waddington, the plastic cups to direct mail printing group, is at last showing signs of delivering on its promise. After a lengthy period of restructuring and investment, including the sale of the Monopoly and Cluedo games business two years ago, Waddington claims to be firing on seven of its eight cylinders.

This is supported by the announcement yesterday of pre-tax profits up 36 per cent to pounds 15.5m in the six months to September. Even stripping out loss-makers since disposed of, the underlying rise remains a healthy 25 per cent.

The one cylinder still misfiring as far as Waddington is concerned is the UK cartons business. Profits there fell 15 per cent despite a 17 per cent rise in sales and it is clear that Waddington is having difficulty handling the supplier rationalisation measures being undertaken by big customers like Unilever, Nestle and Colgate despite its success in winning this much-vaunted "pan-European sourcing" business. Waddington believes things will be sorted out by the year-end and the cracking performance in Europe, where both sales and profits were up by around a quarter, suggests it may be right. Overall, cartons profits were up 9 per cent at pounds 4.6m in the six months.

The group is less worried about the specialist printing mail-shot operation, where profits down 6 per cent at pounds 3.4m were blamed on the installation of new hi-tech presses and a leaner mix of business. The group's investment should leave it well placed to cash in on the increasing importance of sophisticated direct mail in marketing products. But Waddington has been heavily reliant on the one-off bonanza created by building society conversions and flotations and it remains to be seen whether that business can be replaced.

Elsewhere, both the upmarket plastic cups to food containers and pharmaceuticals packaging divisions are tanking ahead. Profits growth of 61 and 55 per cent respectively was driven by acquisitions, but new business growth is strong. A contract with Boston Markets, a US take-away restaurant chain, should deliver $25m (pounds 15m) of business by the year-end.

Full-year profits of pounds 32.5m would put the shares, up 6p at 264.5p, on a forward multiple of 12. Good value.

Wiseman milks Scottish market

In Britain's highly competitive milk market, the strategy of Robert Wiseman Dairies certainly stands out from the crowd. While Unigate and Northern Foods have been scaling down their milk operations to cope with the rapid decline of doorstep deliveries, Wiseman has been doing the reverse. Since coming to the stock market in March 1994, Alan Wiseman's group has been buying up smaller dairies to build market share. It now has almost half the market in Scotland, a figure that will rise to around 90 per cent if its proposed deal to buy rival dairy, Scottish Pride, is cleared by the Monopolies and Mergers Commission. It is also making a push into northern England with a new milk processing plant in Manchester.

Robert Wiseman's advantage over its larger rivals is that it has never really had much of a doorstep milk business. So while rivals have had to cope with painful downsizing, Wiseman has been able to concentrate on developing state of the art plants to service supermarket clients. Its Manchester plant is geared up to supply 100 per cent of its output to the supermarkets.

Though Wiseman shares have performed strongly since their flotation in March 1994, the outcome of the Scottish Pride deal is crucial to future performance. It the deal is cleared the group should enjoy several more years of earnings growth. If it fails and the prize goes to a rival such as MD Foods which is very aggressive on price, Wiseman could find its margins under pressure. A decision from the MMC is expected next month.

In the meantime, acquisitions helped boost first-half profits to pounds 6.1m from pounds 4.6m. Like Northern Foods, margins have been hit due to the weak prices of bulk cream. On a more positive note it has continued to increase sales to supermarkets. BZW is forecasting full-year profits of pounds 12.5m. With the shares 1.5p lower at 174p yesterday they trade on a forward rating of 15. Hold.