Investment Column: Kesa shares look undervalued so buy now

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The Independent Online


Our view: buy

Share price: 125.2p (+0.1p)

It is not only football fans who will mourn the end of the World Cup on Sunday. Kesa Electricals, Europe's third largest retailer of consumer electronics, will also bid a sad farewell to the tournament after the boost it provided to sales of flat screen TVs.

Given this and the significant changes on the share register recently, it is an opportune time to consider the investment case for Kesa, which owns Comet in the UK and Darty in France. Last week, it emerged that Knight Vinke, the activist investor, has taken a chunky stake of more than 3 per cent in Kesa. As opposed to agitating for a change in strategy, market sources suggested that the investor had taken the view that Kesa was undervalued. This opinion is shared by Kesa's board members, who two weeks ago all bought its shares, following the group posting a 17.8 per cent rise in underlying pre-tax profits to £81.9m for the year to 30 April.

Kesa's shares trade on a 2011 forecast multiple of around 10, a substantial discount to rival DSGi, which owns Currys and PC World in the UK, as well as Elkjop in the Nordic region.

The City's bearishness on Kesa's shares partly reflects concerns over the tough trading environment that Comet faces in the UK. However, Kesa is to invest heavily in the chain this year, notably freshening up its branding, refurbishing stores and focusing more on higher margin smaller appliances and accessories. Furthermore, the City's UK-centric view glosses over the fact that Darty continues to deliver the bulk of the group's operating profit. Therefore, along with an improved performance in its developing businesses, such as in Italy, Spain and Turkey, we say that investors could score by focusing on the bigger, long-term picture at Kesa. Buy.

St Modwen

Our view: Avoid

Share price: 175p (+2.9p)

On the face of it, yesterday was a good one for shareholders in St Modwen Properties as the company announced that it was back in profit after posting a loss last year. What's more the property developer offered investors a further boost by reinstating the dividend.

The group said that revenues and profits were up following an improvement on what had been awful years in 2008 and 2009. All good so far, then, and when investors consider that the group considers itself to be hugely undervalued – St Modwen currently trades at about a 25 per cent discount to net asset value – there is clearly an investment case of some strength.

Nonetheless, St Modwen, like other developers, makes us nervous. Bill Oliver, chief executive, says that having the public sector as a key client will help the group in the future, especially as local authorities look to flog off land. But the state is also about to experience some savage cuts, and for us that can only be a bad thing for groups like St Modwen.

Mr Oliver concedes that companies like his are unpopular with the market, but argues that the discount is unjustified. We reckon that while St Modwen is a well-run group, the market is concerned about the spectre of George's Osborne's axe. And like the market, we would urge caution on almost the entire sector. The includes St Modwen. Avoid.

Domino's Pizza

Our view: Buy

Share price: 393p (+2.4p)

When it comes to Domino's Pizza, the question isn't whether it's a good business – a cursory glance at recent results should erase any doubts on that count – but whether it's too late to buy in now. A succession of upbeat updates, coupled with a string of forecast upgrades from the analyst community, have kept the shares on a firm – indeed, strong – footing.

The picture becomes clear when you plot the Domino's share price against the market. While the FTSE 250 has been knocked this way and that by Europe's woes and the increasingly wobbly nature of the recovery, Domino's shares have been in demand, vaulting by around 25 per cent so far this year, as profit-hungry traders seek to capitalise on the public's appetite for Domino's offerings.

Though usually we'd consider banking profits after such a run, we think there's more to come. Next week's interim results could pave the way for the next leg-up as the benefits of the company's promotions and the sponsorship of Britain's Got Talent on ITV are joined by what we expect to be a boost from the football World Cup. Moreover, Domino's isn't the priciest of stocks, with the price-earnings multiple easing from 25.6 for 2010, to 22.9 for 2011 and then 20.9p for 2012, according to Altium. Finally, those worried about the impact of a sluggish recovery need only revisit Domino's resilience during the slump. Buy.