Investment Column: DSGi shares are still on the roller coaster
Jarvis; Clinton Cards
Friday 27 November 2009
Our view: Hold
Share price: 37p (+0.43p)
It has been a roller coaster ride for DSGi, the pan-European electricals group that owns Currys and PC World, in 2009. The group has ditched certain formats in Sweden and Finland, raised £293m in a rights issue and battled one of the most brutal recessions for decades.
Yesterday, its interim results for the 24 weeks to 17 October suggested the journey for the next year may be less bumpy, although it contained mixed news. On the downside, DSGi posted a half-year loss of £23.1m, after deductions, although this was better than the City expected and less than half of last year's dreadful £55.6m loss.
It unveiled another dire set of underlying sales, down by 15 per cent at PC World in the UK, which contributed to group sales lower by 4 per cent. The company also continues to find life tough in the Czech Republic, Greece and Spain, although it has taken radical steps to reshape its portfolio in the latter and gross margins are heading in the right direction.
On the plus side, DSGi provided plenty of upbeat news for investors to sing along to on one of Currys' stereos. The group's underlying sales have rebounded to be up by 1 per cent in the past eight weeks. In the UK, the launch of Microsoft's latest operating system, Windows 7, on 22 October rebooted PC World's underlying sales, taking them into positive territory with associated margin uplifts. Furthermore, DSGi wants to "accelerate" the roll-out of the new format Megastores and combined 2-in-1 Currys and PC World formats in the UK, the first 11 of which have delivered average gross profit increases of 57 per cent.
However, DSGi's shares, which trade on 2010 price to earnings ratio of around 40, are not cheap. Overall, we think the outlook for DSGi now looks rosier, but we are not yet ready to gamble, as there are safer retailers to hitch a ride on for the time being. Hold.
Our view: Avoid
Share price: 14p (-1.5p)
Anyone using the UK's railways knows all about delays, especially if they have had the unrivalled pleasure of catching a "rail replacement bus service" over the past few years having bought a ticket to travel on the West Coast Main Line.
For the rail contractor Jarvis, Network Rail's delays in dolling out new work have also caused problems. The group reported an adjusted first-half loss of £3.6m yesterday, after a profit of £4.4m in the same period in 2008, blaming falling volumes in workload.
But its chief executive Stuart Laird argues that there is a silver lining: the company has managed to cut costs (jobs) and bring in new business development resources (people), making Jarvis a leaner and meaner machine.
Sadly, while the group certainly has a good chance of winning some juicy contracts, there is nothing of size that has yet filtered through and if the maxim – you are only as good as your last performance – is true, then there is little to recommend Jarvis shares.
Analysts at house broker KBC unsurprisingly argue that punters should buy the stock, pointing out that, "Jarvis enjoys a leading position in the UK rail industry and is well positioned to benefit from the anticipated increases in rail infrastructure spending. Furthermore, with a restructured cost base the potential for rapid earnings recovery is high. In the short term the timing of recovery remains uncertain but the patient investor is likely to be rewarded".
True, the stock is pretty cheap, but with no dividend, we see little reason why investors should be patient. For the time being there are hotter stocks than Jarvis, which is one to avoid.
Our view: Hold
Share price: 733p (-25p)
The greeting card retailer Clinton Cards has had a good year on the stock market. Investors who had the foresight to buy at the end of 2008, when the shares were at 5.5p, are sitting on returns of more than 800 per cent. But is there more to come, or is the stock likely to run out of steam in the months ahead?
Thanks to the rush over Halloween, trading over the 16 weeks to 22 November was strong, with the company reporting a 3.6 per cent rise in like-for-like sales. The Birthdays stores, which were acquired out of administration, continue to improve and have been meeting Clinton's expectations. Moreover, the shares trade on a relatively undemanding multiple of 8.8 times Altium's forecast earnings for July 2010.
But considering the competition posed by the internet, we think the shares may come under pressure. A significant pullback would present a buying opportunity, in our view. Hold.
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