The Investment Column: Pound hammers Kenwood

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The Independent Online
Shareholders in Kenwood must be fuming. A year ago, the troubled electronic appliance maker received an informal approach from Pifco, its smaller but more successful rival. At the time, Kenwood's shares traded at around 200p. The talks broke down, however, and since then Kenwood's shares have plummeted. They closed down 6.5p at 111.5p yesterday.

Not that Kenwood can complain. Interim results showed a 16 per cent slide in sales and operating profits. Chief executive Colin Gordon, the former Grand Met man who took over in February, argues that the strong pound wiped pounds 1.9m off profits. Given that the currency is actually squeezing export sales - rather than just reducing the value of overseas earnings - this amounts to saying that Kenwood would be fine if only it wasn't doing so badly.

To be fair, Mr Gordon seems to have the right idea. He's farming out basic manufacturing to subcontractors, culling unprofitable lines, and hiking prices for the more popular products. This should have been done five years earlier, but that's hardly his fault.

Is this a turning point? Certainly, margins should pick up as cost-cutting and price increases feed through. But any recovery will be slow and painful. Currencies will continue to hurt and Kenwood remains burdened by a pounds 47m mountain of short-term debt. Mizushi, its Italian subsidiary, is being run at breakeven because it is too expensive to close and no one wants to buy it.

Brokers forecast full-year profits for Kenwood of pounds 6m, implying a forward p/e ratio of 12. That leaves the shares looking fairly valued. Shareholders can hang on in the hope that, now the size of its target has halved, Pifco plucks up the courage to mount a hostile bid. But it's hard to see what a predator could do that the current management isn't doing already.

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