Thorn share price rocked by profit warning

Demerger fails to boost shareholder value as third-quarter figures cause dismay in the City

The slump in the stock market value of Thorn since it demerged from the EMI music business last summer threatened to turn into a rout yesterday after the Radio Rentals to Crazy George's group warned that poor trading and the strong pound would hit profits in the year to March.

Thorn's shares, which started trading at 408p last August, slumped 42.5p to 209p in heavy trading after the company issued a nine-month trading statement in which it warned investors it would make no more than last year's pro forma pounds 170.7m pre-tax profit.

The slump caused dismay among shareholders who had expected the split from EMI to enhance shareholder value in the same way that similar splits by companies such as ICI and Zeneca and Courtaulds had unlocked previously hidden potential. Thorn's stock market value has slumped from pounds 1.77bn to pounds 905m.

The warning, which accompanied nine-month results, shocked analysts who had pencilled in profits for the year of about pounds 180m. Nick Bubb of MeesPierson said: "The third-quarter figures aren't too disastrous but what they are implying about the fourth quarter takes our forecast down another pounds 10m or so."

A spokesman for Thorn said the problems had been concentrated in December. He added that because turnover in the rental business comes in the form of future monthly payments rather than one-off payments, the full impact of a poor pre-Christmas sales period would only be fully felt in subsequent months.

Third-quarter figures for the nine months to December showed an 8 per cent increase in profits before tax and exceptional items to pounds 123m struck from sales 5 per cent higher. But the fourth quarter is expected to be further hit by the strength of the pound, which is forecast to wipe out 10 per cent of US profits on translation.

Thorn is the latest UK company to complain about the impact on profits of the recent surge in the value of the pound. Guinness said last week that 1997 profits would suffer to the tune of pounds 60m and ICI and British Steel have seen analysts downgrade profit forecasts to reflect sterling's rise.

In the US, where Thorn generates about 60 per cent of its turnover, sales were hit by a price war in the consumer electronics retail market between two of the largest players, Circuit City and Best Buy. With prices of items such as video recorders falling to less than pounds 100 in some cases, the market for renting to low-income households had dried up.

In the UK, Radio Rentals, which together with Granada controls about 85 per cent of the rental market for consumer electronics, sales had been particularly poor. Thorn admitted it had priced its personal computer rental contracts too high and failed to respond to extreme competition in small screen televisions from Granada.

Poor trading and foreign exchange worries are the latest cloud to darken Thorn's prospects since demerger. They add to the concerns already surrounding the company regarding a spate of court cases in which Thorn is being sued for millions of dollars over the pricing of its rental contracts.

Litigation has focused on whether Thorn's contracts should be covered by consumer credit law which in many states caps the annual percentage rate at which interest can be charged.

Although Thorn claims its contracts are for rental agreements, not credit sales, but sentiment has been hit badly by the loss of two cases in the past four months.

Other concerns include the perception that the market for renting consumer electronics goods is fast disappearing as the products become cheaper. Thorn says it is responding by moving into new rural geographic areas, where there is less competition, and new product areas, such as car rental where it currently has no exposure.

The latest fall in Thorn's share price completes an uncomfortable first five months on the stock market which began with a 17p first-day slide to 391p. EMI, by contrast, jumped to a 37.5p premium on the first day of dealings to pounds 14.60, buoyed by bid speculation. In the absence of any activity, however, EMI has also underperformed in subsequent trading, closing yesterday 13.5p lower at pounds 12.30.

Comment, page 15

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