Time to cut Somerfield losses

The Investment Column

SOMERFIELD HAS been keeping a low profile this year, quietly watching its shares slip from 450p to 274p amid rumours that its Kwik Save stores, acquired last year, were struggling. In the absence of information from the company, brokers decided something was wrong and reinforced the decline. Although some expected the shares to enjoy a re-rating when Somerfield posted annual results, yesterday's numbers confirmed the rumours and the shares fell further. This is no buying opportunity.

Somerfield acquired over 800 Kwik Save stores last year with the intention of converting them all to the Somerfield brand. That now looks like a Herculean task. Of the sixty conversions so far, a third have seen sales decline or reverse. In the remaining Kwik Save estate, sales fell 3 per cent in the first half of last year, and 9 per cent in the second. Kwik Save accounts for around 45 per cent of group sales.

Somerfield believes Kwik Save shoppers are largely pedestrian pensioners. About 40 per cent of the Kwik Save estate caters for "trolley pushers" on the weekly shop. These are the type of store which have reacted negatively to the Somerfield transformation process. In reality, Kwik Save can no longer compete with the likes of Asda and Tesco. Customers are finding better value out of town.

Converting is hardly the solution. The fear of the unknown grips shoppers, says chief executive David Simons, when they encounter the Somerfield brand, which is associated with the pricey south.

What's needed is some good news about Somerfield conversions. Admittedly, manyKwik Saves earmarked for conversion this year are smaller stores aimed at "top-up" shoppers, where conversion has been successful. But Somerfield is beginning to look like a rag-bag of former Gateway and other shops no one wanted in uninteresting locations.

Mr Simons reckons there's a virtue in secondary market, neither out-of- town nor city-centre. Somerfield's underlying profitability is nevertheless declining. To stick to the conversion project, Somerfield must invest pounds 102m. Meanwhile, the home shopping concept launched yesterday will not break even for at least three years.

Analysts' expectations for Somerfield vary widely. Profits forecasts vary between pounds 195m and pounds 240m this year. Morgan Stanley anticipates earnings per share of 36p, rising to 37.9p in 2001. The shares are on a forward p/e of 8, more than fair for a group showing clear signs of decline. Investors should cut their losses and sell now.

u

Kenwood

POOR KENWOOD. The once mighty kettles-to-hair-curlers group has been the victim of nearly every malignant market trend. From the pariah status of small-cap manufacturers to the strength of sterling, Kenwood has suffered more than almost any other stock.

In its last reporting year, Kenwood issued three profits warnings. In March the shares slumped 20 per cent when the group said it would go into the red. Yesterday it revealed the extent of the dip - pounds 9.8m last year against a profit of pounds 2.5m the year before. The shares slumped again, from 71.5p to 66.5p, less than a fifth of their value five years ago.

In 1997 Colin Gordon became chief executive and decided on radical action. The global workforce was cut by over 900 and manufacturing moved to China. Mr Gordon concentrated on small domestic appliances, arguing that brands like the Kenwood Chef were still robust if they could be produced more cheaply - borrowings would be cut and products refreshed.

But the turnaround has been more expensive and more protracted than he hoped, and the market has evidently lost patience. Analysts still expect Kenwood to produce a loss in the current half-year, perhaps breaking even in the full year. But margins are improving and the underlying business looks good.

With forecast earnings of 8p a share to 2001, Kenwood is on a forward multiple of 8. In Kenwood's case, that's cheap. If the pound falls, Kenwood is in a good position to take advantage. Its industry is under pressure to consolidate, and a cleaned-up Kenwood would be a perfect takeover target. Buy.

u

Skillsgroup

SKILLSGROUP, the IT consultant formerly known as P&P, is expected to deliver 50 per cent profits growth within two years, but it trades on 35 per cent discount to slower-growing peers. Has the market missed something? As P&P, the company specialised in reselling computers. The group has nowtransformed itself into an IT services company standing on three legs, training, consultancy and supplying servers.

These activities enable businesses to generate value from the knowledge that exists in separate parts of the organisation and which is greater than the sum of their parts.

The training division, operating under the QA brand, has won huge contracts recently from Vodafone Airtouch and BT. Meanwhile, the consultancy division has been beefed up by recent acquisitions. It benefits from tip-offs from the hardware division, Acuma, which installs servers costing pounds 100,000 a piece. Installation offers the company a marketing forum for its other services. Acuma delivered 38 per cent underlying revenue growth last year.

So why the market's caution? Perhaps it lies in the difficulty of finding comparable Skillsgroup accounts, because it has made so many disposals and acquisitions.

But this is about to change. Chairman David Southworth says there will be no more big purchases. Forthcoming results will be more easily comparable and shout the extent of the group's progress.

DKB expects pre-tax profits of pounds 20.3m this year and earnings of 17.3p, rising to pounds 25.5m next year and pounds 30.2m in 2001. That factors in an expected freeze on IT spending ahead of the millennium, which the company's seen no signs of yet. Buy.

Start your day with The Independent, sign up for daily news emails
Voices
Lucerne’s Hotel Château Gütsch, one of the lots in our Homeless Veterans appeal charity auction
charity appeal
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
PROMOTED VIDEO
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
News
ebooksNow available in paperback
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
tech
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Voices
Jimmy Mubenga died after being restrained on an aircraft by G4S escorts
voicesJonathan Cox: Tragedy of Jimmy Mubenga highlights lack of dignity shown to migrants
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum