Investment Column: Too much bad news from uncertain Kesa
Stagecoach Group; Avocet Mining
Thursday 25 June 2009
Our view: Avoid
Share price: 109.5p (+6.75p)
The key highlight in Kesa Electricals' preliminary results yesterday, according to analysts at Investec, was that the company cut the dividend to 5p, "compared with consensus forecasts of 7.2p," which they said was a "sensible adjustment... given the outlook for earnings and cash generation."
Well, whoopee! If that was the highlight, the rest was predictably bad. The group, which owns the electrical goods store Comet and Darty in France, as well as a host of others in other European countries, said that profits were down from £141.3m last year to £77m this time around. Including exceptionals, the group slipped to a pre-tax loss of £81.1m and revenues, on a constant currency basis, were also down.
The most worrying aspect of the announcement was not the drop in profits, or even the dividend cut (although unlike Investec, we can hardly describe that as a highlight). No, the most worrying part was that the group sees no end in sight to the dreadful trading conditions it finds itself in. The stock was up 6.6 per cent yesterday, but with a falling dividend and profits, and not a green shoot in sight, we can think of few reasons to buy the shares.
Unlike us, some analysts were supportive. The experts at Numis reckon clients should buy: "Now trading on sub four times enterprise value to Ebitda and with well-positioned businesses in France, Holland, Belgium and the Czech Republic, we remain positive, particularly given the weak comps facing the business". Those at UBS say that the stock will reach 140p.
Of course, we could be wrong and investors may do very well from betting on Kesa – after all the stock is cheap at these levels, the group has got cash and thinks most of its losses are due to start-up costs relating to new businesses. However, we would argue that in these worrying times, punters should be looking for companies performing solidly and with a clear idea of what will happen in the next year. Buyers would get neither from buying Kesa. Avoid.
Our view: Buy
Share price: 127.75p (+10p)
The Department of Transport is "either dysfunctional or deceitful," says Stagecoach, the bus and train operator. The spat concerns what Stagecoach says are its contractual rights to certain revenues under its franchise to run South West trains, and the Government's decision to settle the matter in the High Court, rather than opting for the quicker arbitration route.
Either way, the company is not getting what it expected under the franchise agreement to run the train company, and that should be a concern for investors.
Indeed, it is probably what has held back the stock. The shares have been pretty unimpressive in the last few months, against a very good operational performance, including a 12.6 per cent jump in full-year profits, announced yesterday. The profits are being driven by a buoyant bus division, which is more than making up for a train operation that without government-supported revenues is feeling the pressure of commuters losing their jobs.
On paper, Stagecoach is a great stock, and a positive outcome to its fight with the Government should send the shares soaring. In the meantime, a dividend increase will keep investors going. Buy.
Our view: Hold
Share price: 81p (+1p)
Investors could be forgiven for thinking that with gold prices at historic highs, a group that produces the stuff would be a sure-fire investment. Sadly for Avocet Mining, problems at its Malaysian operation have hit at just the wrong time. The group reported its preliminary results yesterday, saying that pre-tax profits were down 10 per cent on lower production, and with the grade of ore falling below what had previously been expected. The chief executive, Jonathan Henry, admits that shareholders remain frustrated and that the company has not lived up to its promises.
There is clearly a great deal of uncertainly about Avocet and investors should be cautious. The group says it is re-assessing the quality of the Malaysian operation and will update shareholders in September. It urges buyers not to forget that it has three good quality mines and that, unlike most Aim-listed gold explorers, Avocet is in production and is profitable.
The shares are cheap and should be doing better. They will get a kicker if the news in September is good, but so far, however, Avocet has largely been long on promises and short on delivery and we would wait for some sure-fire news before buying in. Hold.
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