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.



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.



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.