Investment Column: Still awaiting dividend revival at DSG

Pendragon; YouGov
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The Independent Online

Our view: Hold

Share price: 26.46p (-0.59p)

DSG International expected sales of TVs to slow down after the World Cup's final whistle, but the owner of Currys and PC World will be concerned by the British Retail Consortium's declaration yesterday that electricals are weak across the board. Computer sales, it said, were "promotion-led", ie cheap.

Given the severity of the Government's austerity measures, the outlook is not rosy in the UK, or across Europe for that matter.

Let's cheer the enormous progress that DSGi has made under its chief executive, John Browett, the former Tesco director who joined in December 2007. He has ditched loss-making operations in Finland and Sweden, while retaining its star-performing Nordic Elkjop chain. He has streamlined the previously struggling Italian and Spanish businesses. In the UK, DSGi has got a sales uplift at its 164 upgraded stores, including the combined 2-in-1 Currys and PC World shops and its "big box" Currys Megastores. These were introduced partly to combat the threat of the US electricals giant Best Buy launching on these shores earlier this year.

The end result was that DSGi, which also operates the Dixons e-commerce site, grew its underlying profits by 61 per cent to £90.5m for the year to 1 May. While it has been a rollercoaster ride for DSGi's shares over the past two years, they now trade on a 2011 price to earnings ratio of 11.2, which is around the average in the retail sector, right where it should be.

DSGi shareholders are expected to approve the change of its corporate identity back to Dixons Retail at its annual meeting next month, but we would be looking for a less cosmetic change before turning positive on the stock. The company has declined to provide a timeframe for reinstating its dividend. Despite its recent momentum and progress, the next year will be a tough one for electricals chains, so the cash may not be forthcoming immediately. Hold.


Our view: Hold

Share price: 24p (+0.5p)

Strong results from Pendragon look like good news for the recession-whipped car industry. The automotive retail group saw revenues up by 16 per cent to £1.8bn and underlying pre-tax profit booming by 48 per cent to £15.7m in the first half of the year.

And although total British car sales dropped by 13.2 per cent last month – following the withdrawal of the Government's scrappage incentive – Pendragon's prognosis for the year is still good – "assuming economic and market conditions remain stable".

There's the proviso, as described by chief executive Trevor Finn, and it's important. Pendragon's stock looks attractively valued if it hits forecasts, trading on a price-earnings ratio of 10.7 times this year, falling to just 7.5 times in 2011, according to Panmure Gordon. It is a good sign that the strongest-performing of the group's businesses is the prestige Stratstone chain, where sales volumes are up by one fifth.

But investors would be unwise to be more optimistic. The recovery in the car market is still not enough to make up for its spectacular recessionary collapse, and the combination of the end of scrappage and worries about a double dip in the economy threaten to drag consumer confidence back down.

If investors must test drive the automotive sector, Pendragon's respectable valuation makes it is as good a stock as any. But it is still a punt on a highly uncertain future. Hold.


Our view: Buy

Share price: 39.75p (+0.75p)

YouGov has been particularly visible in the UK this year as it provided reams of polling data around the general election, yet the group is currently looking across the Atlantic for its expansion plans.

Yesterday, it announced the acquisition of Harrison Group, a US research agency, for up to $13m. Chief executive Stephan Shakespeare, who took over after the election as the previous incumbent was selected as a Conservative parliamentary candidate, said the company had been looking to spend its cash "cushion" and the deal will not require raising any debt.

"This allows us to bulk up and take a significant place in the US market," he said, adding that there would be interesting opportunities with Harrison's blue-chip clients.

The house broker, Numis, upgraded its earnings per share forecasts, thanks to the deal.

YouGov shares have been languishing under 40p for the past two months, the result of a nasty first-half loss. The company may be premature to claim it has "turned the corner", but its ambitious plans make it worth investing for the medium term.