THE INVESTMENT COLUMN
Friday 24 November 1995
Storehouse has had its share of problems in the past, but the BhS and Mothercare group is now looking in better shape than many of its rivals on the high street.
Yesterday the company turned in another good performance with interim results above most expectations. Pre-tax profits for the six months to October were up a thumping 42 per cent to pounds 34.5m.
Mothercare more than doubled profits to pounds 9.3m and BhS edged up 10 per cent. Even Blazer, the small chain of upmarket clothing stores, is threatening to make money.
The foundation of Storehouse's success thus far has been chief executive Keith Edelman's focus on the nuts and bolts of retailing. All chains are concentrating on building margins rather than chasing sales. More attention is being paid to better buying, thus preventing costly end-of-season markdowns. The supplier base is being pruned and costs tightly controlled.
Management time is also being concentrated on fewer formats. One Up, the lower-priced format born of some of the more downmarket branches of BhS, was the latest to go. It was sold to Associated British Foods for pounds 1.2m in June.
It is significant, however, that Storehouse's improved half-year results came on sales that were flat at pounds 518m. So far, profits growth has been coming from reduced costs and improved margins.
This is all very well but there is only so much that can be cut from costs. Indeed costs are expected to rise in the second half. Group sales have been level for five years now and at some point management will have to produce growth.
BhS, which accounts for two-thirds of both group sales and profits, seems to be responding well to new initiatives. The gross margin improved by 1.5 percentage points owing to fewer markdowns.
Like-for-like sales fell by 3 per cent, but this was due mainly to a more stringent policy on the Choice discount loyalty scheme, and the effects of the summer heatwave.
At Mothercare, 60 per cent of the sales space has been re-designed with a new kiddie-friendly format complete with talking trees and carpets with fibre-optic lighting that changes colour. The pounds 100m programme should be complete in two years. At Blazer, three of the poorly-located stores will close.
Storehouse shares have trebled over the last five years and risen by 50 per cent this year alone. Along with Next, this makes it one of the sector's best performers. Up another 10p to 332p yesterday, and with analysts forecasting profits of pounds 110m for the full year, the shares are on a forward rating of 19. This is high, but there should still be more growth to come.
Babcock returns to its old form
Babcock International has had a richly chequered past. Sorting out the one-time boiler-making to dockyard management group defeated Lord King, Jeff Whalley and Tony Gartland, three of the stock market's chosen people in the 1980s. Now almost two years into another recovery programme under new management, Babcock already seems to be returning to its old form.
Interim results were never going to inspire and the fall in underlying pre-tax profits from pounds 2.83m to pounds 2.18m before exceptionals reported yesterday duly lived up to the low expectations. But an interim dividend of 1.25p, the first for three years, reflects the confidence of management that the group has at last turned the corner.
Certainly, a great step forward in "de-risking" the balance sheet was made in September, when a 75 per cent stake in the historic boiler-making business was dumped on Mitsui of Japan for pounds 56m. At a stroke that removed enormous trading losses, chipped in a pounds 26m sale profit to the interim figures and left net cash of pounds 33.2m at the end of September.
But no sooner had that problem been sorted out than another has emerged. Babcock's normally strong German materials handling business has been pushed into the red by the strength of the mark and high labour costs. With commendable speed, management has decided that deeper surgery is needed, providing pounds 9m to slash capacity.
The hope is that with other areas of materials handling pushing ahead a pounds 1.88m divisional loss can be recovered in the second half, with up to pounds 8m bottom-line benefits in a full year. The question remains, however, whether this will be enough to offset the German offshoot's exposure to the cement cycle, now in decline.
Group profits of pounds 14m before exceptionals would put the shares at 148p, down 13p, on a forward p/e of 27. The shares are factoring in further recovery and a successful bid in the privatisation of Rosyth naval dockyard, which Babcock manages and which remains the backbone of group profits. Victory could secure those until 2006, but the shares are high enough.
Bright shining lights at TLG
Shares in TLG have had a storming rise since the flotation of Thorn EMI's former light fittings operations at 115p a year ago. Although down from a peak of 181p in October, investors have still locked in healthy gains even with the shares off 2p at 167p yesterday.
The pounds 77m raised in the offer for sale wiped out huge debts built up at the time of the management buyout from Thorn in 1993, so it was hardly surprising that TLG would sparkle with its first full set of interim results as a listed company. Yesterday it duly turned in pre-tax profits of pounds 11.4m for the six months to September, up from pounds 4.4m before. The figures were accompanied by a maiden interim dividend of 1.4p.
A better picture of the underlying state of trading is given by pre-interest profits, which rose from pounds 9.6m to pounds 12m. This is an impressive result, given that close to 60 per cent of sales are into the commercial property market, which in the UK remains in the doldrums.
The company has built a leading position in so-called specified business, where architects or electrical contractors choose a particular type of kit, rather than buying it straight off the wholesaler's shelf. Boosted by office refurbishment and new products, UK profits have responded accordingly. Operating profits in the core home market were up nearly an eighth.
In Germany, margins have been squeezed as the economy turns down and customers move towards lower-priced, lower-specification fittings. This should eventually help the company to take advantage of its lower cost base outside Germany to ship in product, but in the meantime price pressure continues to cause pain.
Longer-term, the Far East should provide opportunities. TLG has already seen a 20 per cent growth in sales to Hong Kong and mainland China this year so far, with margins a fat 8 per cent.
Profits of pounds 29.5m for the full year would put the shares down 2p at 167p on a prospective multiple of 15. Reasonable value, although the 19 per cent stake still held by Investcorp, one of the buyout's original backers, could overhang the shares.
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