Storehouse owns up to its mistakes

The Investment Column

Several retailers have taken a pummelling in the last few months, but none more so than Storehouse. Shares in the BhS and Mothercare retailer have been hit hard, falling from last year's high of 359p to barely more than 200p last week.

As recently as January they stood at 300p but since then, when Storehouse issued its Christmas trading statement, even the company's own joint brokers have been taking the knife to their forecasts. SBC Warburg and Cazenove have now downgraded from pounds 148m to pounds 130m.

City scepticism has centred on nervousness about the company's ability to grow sales and concerns that its costs were higher than it was reporting.

As it turned out the results were no worse than expectations, with pre- exceptional profits 16.7 per cent higher at pounds 119m in the year to 29 March. The shares, which had been edging up this week, rose 7p to 223.5p.

But the market is not wholly convinced. True, there was an element of mea culpa about yesterday's presentation. Management admitted that some its stores looked like something out of the 1970s and that some of its products and systems left a lot to be desired.

They admitted that mistakes had been made, particularly in childrenswear. And that they had been slow to see the boom in branded sportswear, which is hitting sales of older children's clothing hard. That is belatedly being addressed, with secondary brands of sportswear being introduced in BhS and the larger Children's World stores.

But analysts point to relatively weak sales, with like-for-like sales 3.1 per cent higher in BhS last year, but 3.3 per cent down in Mothercare. Markdowns of unsold goods seem to have been a problem in both businesses, affecting margins.

The company's supporters say the worst is over. The management aims to make Children's World into a "category killer" in the nursery equipment market, attempting to lead the market with giant stores. Refurbishments in the BhS stores are increasing sales growth. And the international division, which has sales of almost pounds 100m, is being expanded into eastern Europe and the Far East.

Judging Storehouse is difficult. BhS is strong in the mass market sector and 90 per cent of pregnant mums visit Mothercare.

It is just that not enough of them buy anything. Confidence in this company has been badly shaken, but on forecasts of pounds 127m it trades on a forward rating of just 11. At these levels it may now be worth a look.

Vosper's future looks shipshape

Shares in Vosper Thornycroft have rather run out of steam over the past two years, despite the warship builder's faultless profits record. Few could quibble with another very healthy set of figures yesterday showing pre-tax profits climbing 11 per cent to pounds 30.7m in the year to March, with cash balances rising 45 per cent to pounds 116m.

Some of that money represents advance payments from customers for Vosper's ships, but the pounds 90m which is the company's own represents nearly 280p a share. That is more than a third of the share price, which edged up 3.5p to 807.5p yesterday.

On the face of it, all is looking rosy for Vosper. Profits in the core shipbuilding operations rose 12 per cent and the order book appears good. Around half the group's pounds 300m of orders relates to ships, which is roughly equivalent to last year's turnover in the business of pounds 147m.

There is a strong "base load" going forward in the shape of the pounds 170m Royal Navy contract to supply seven minehunters up to 2001. Vosper has also signed a memorandum of understanding with Qatar to supply two pounds 50m patrol craft and is in pole position to win the follow-on order of three minehunters for Saudi Arabia, having built the first three in a pounds 150m deal.

The problem, say the bears, is that in the new competitive world of defence contracting, these orders will not be as lucrative as the ones which aremaking so much money for Vosper. Meanwhile the diversification into non-shipbuilding work, ranging from providing the careers service in three English counties to doing the maintenance at GCHQ at Cheltenham, is only being driven by acquisitions.

Even so, the return on capital in the new businesses at 40 per cent looks appetising and group profits of around pounds 33m this year would put the shares on a lowly forward multiple of 12, falling to 8 if the cash is stripped out. Hold on.

Celsis needs to shake the inertia bug

There is a risk that the market has dismissed the potential of Celsis. True, the group, which develops fast, simple machines to detect bugs in everything from shampoos to cough syrups, has some prejudices to overcome.

Though Celsis is a diagnostics company, it tends to get lumped in with the volatile biotechnology sector. So when share prices flop there it suffers collateral damage, while no one expects much upside from a maker of diagnostic kits. Since Celsis floated at 100p in 1993, its share price, currently up 2p at 104p, has done little, partly on disappointment that despite management's unshakeable belief in the prospects, the group is still loss-making.

But Celsis has strengths which could change that. First its products, based on established bioluminescence technology, look good. Celsis' hand- held SystemSure device recently got the thumbs up from an independent US research group, which rated it more sensitive and reliable than rival machines. The group has forged alliances with cash-rich partners whose sales teams ensure faster and more thorough access to a huge, largely untapped market of around pounds 3bn. Finally, joint venture partners shoulder most of the research costs and Celsis has pounds 5.4m cash in the bank.

Competition will spring up as 97 per cent of companies still use agar plates to test for bugs, a slow and complicated method. But it is comforting that Celsis bought its key competitor, Lumac, last October.

Celsis could hit profits this year. Underlying losses for the year to March fell a third to pounds 4m, with underlying sales more than doubling to pounds 8.3m. Panmure Gordon forecasts pounds 3m profits for 1998 and pounds 10m for 1999. With no products to fail, inertia looks the biggest risk for these shares. But on 10 times 1999 earnings, they are worth a punt.

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