Somerfield faces uphill struggle

The Investment Column

For a company that has spent the best part of a decade as the butt of retail jokes, Somerfield has actually had quite a good year, once it had shaken off the debacle of last summer's flotation. The price had to be cut twice to get the issue away, but shares in the former Gateway supermarkets business have since performed quite strongly. Eventually priced at 145p, they have risen to 189.5p, outperforming the FT All Share index by over 7 per cent and the food retail sector by 9 per cent, in spite of yesterday's 6p fall.

Given the amount of abuse hurled at the company during its float run- up, this is no mean feat. But the question now is whether this performance is sustainable.

Analysts point out that nearly all the early outperformance was achieved on day one, when the shares jumped to 171.5p. Since then, Somerfield has traded virtually in line with the sector and with greater risk attached, given the company's potentially vulnerable position to competition on the high street. Meanwhile, the yield, which was around 9 per cent at the time of the float, is now around 5.6 per cent and so not quite the attraction it once was.

Some of this is a bit harsh on Somerfield's management, whose debut full-year figures were better than many of the company's critics were expecting. Pre-tax profits were at the top end of expectations, up 15 per cent at pounds 105m. Margins edged up from 3.2 per cent to 3.6 per cent and the Somerfield-branded stores showed like-for-like sales growth of 4 per cent. This is good but only half the story.

Somerfield still has a long tail of unconverted old Gateway stores, where sales fell by 5.4 per cent. Worse are the Food Giant discount stores which, though profitable, saw same-store sales fall by 8 per cent.

All this gave a group like-for-like figure of just 1.4 per cent, which has fallen to 0.2 per cent in current trading, with decent volume growth offset by food price deflation. A further worry is that these figures must have been boosted by the launch of the company's loyalty card.

Somerfield is improving margins and working to reduce costs and improve relations with suppliers. It is selling parcels of Food Giant stores when it can. Twenty-two were offloaded to Spa this year without the need for write-offs.

HSBC James Capel is forecasting profits of pounds 106m this year, which puts the shares on a lowly forward rating of seven. Cheap, but with competition crowding in, Somerfield is going to find life increasingly difficult. Avoid.

Odds are in Stanley's favour

Betting may be a mugs' game for the punter but the likes of Stanley Leisure, the UK's fourth-biggest betting chain, keep raking in the cash. Pre-tax profits rose by nearly a third to pounds 19.4m in the year to April, with racing profits galloping ahead from pounds 7.2m to pounds 13m despite the "Dettori effect", when the popular jockey rocked the racing world by riding seven winners in a row at Ascot and cost Stanley more than pounds 2m in one fell swoop.

The message from Stanley is that the bookies seem to have emerged relatively unscathed from the introduction of the National Lottery and its scratch cards. The acquisition of betting chain Gus Carter looks a good buy and Stanley still has the appetite and cash to buy more businesses. Further out it is likely to get into bingo and hotels.

Stanley has also benefited from the Government's decision to relax gaming regulations, allowing more slot machines with higher payouts into betting shops.

But the performance from its casino business was much less impressive, even though it can now put one-arm bandits alongside the roulette wheels.

Casino profits edged up from pounds 10.5m to pounds 11m, but gaming margins slipped by half a percentage point to 16.4 per cent due to higher staff costs. The company is paying higher wages and investing in training in an attempt to keep staff longer.

Analysts forecast current-year profits of pounds 25.5m, putting the shares, unchanged at 310.5p, on a prospective p/e ratio of 20. This toppy rating, a 30 per cent premium to the market, anticipates extra profits from the deregulation of the gambling market.

Stanley, along with the rest of the industry, is lobbying the Government to give its customers the chance to place bets on the Lottery, or play slot machines that pay out pounds 250 prizes. Together these measures could easily add pounds 5m to the bottom line.

Investors could do worse than having a punt on Stanley. But most of the upside already looks to be in the share price. Fairly priced.

Hi-Tec stands up to the big boys

Hi-Tec Sports, the branded footwear group, has never lived up to expectations. Among its many problems, Hi-Tec has faced dumping from its bigger US rivals, such as Nike, and extreme difficulties holding on to management. At least 12 members of the board have departed since the beginning of the 1990s.

But yesterday's results, showing pre-tax profits up 55 per cent at pounds 3.14m in the year to 2 May, provide some evidence that the group is climbing out of its hole. Particularly welcome is news that it is returning to the dividend lists after two years with a final payment of 1.2p.

There are signs that the board is becoming more stable. Paul Harrison,finance director, was yesterday appointed chief executive. Mr Harrison has been with the group for three years and in all, the four executive directors, including previous chief executive, Terry Mackness, have now been together for two years.

At the trading level, margins are slowly increasing as the group gets to grips with rationalising its brands and its costs, while gearing has tumbled from 90 per cent to 21 per cent over two years. The group also seems to be holding its own against the big boys, with sales down just 2 per cent last year, but it remains to be seen whether it can generate decent top-line growth.

Hi-Tec shrugged off the recent string of profit warnings in the sector, saying there remained plenty of opportunity for its Magnum work boots in the US and sports shoes at home. The stock market may take some convincing and Frank van Wezel, chairman and 52 per cent shareholder, has to prove he can work with his fellow directors.

Even so, the shares, up 1.5p at 38.5p, appear to be discounting the worst on a forward multiple of 7, assuming profits of pounds 4m this year. Hold on.

Start your day with The Independent, sign up for daily news emails
A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
Sean Abbott
cricketSean Abbott is named Australia's young cricketer of the year
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea