DVD revolution should propel HMV

Aga saga begins to run out of steam; T&G likely to remain in the small broker league

Stephen Foley
Friday 17 January 2003 01:00

When this column last wrote on HMV – the music, video and games retailer which also owns Waterstone's bookstores – at the time of its stock market flotation last May, one in 10 UK households had a DVD player. Now the figure is approaching a quarter of all homes, and HMV has practically cleared its shelves of old-style videos to make way for DVDs.

This revolution in home entertainment drove results from the group yesterday. European stores (almost wholly in the UK) saw like-for-like sales growth of 6 per cent, with new store openings swelling total sales growth to 13 per cent. The business throws off cash and, with rents falling, the group can easily expand its portfolio of 155 UK stores to about 230 in five years. Meanwhile, customers will need to stock up on DVDs to feed the new player they got for Christmas, so there is plenty more in that market to go for. It now accounts for more than 40 per cent of HMV Europe's sales, about the same as music.

There were weaknesses: computer games sales have been disappointing as software has been bundled together in gift packs with consoles. And losses are still widening in the Canadian division, which could be a thorn in the group's side for a while yet because that CD market is contracting sharply.

But overall the picture is rosy, particularly thanks to the improved news from Waterstone's. One of the reasons for floating the group was that it would free up capital to improve the ailing book chain After a period where online retailing has changed the competitive landscape for booksellers, Waterstone's needed some TLC and the new management has begun sprucing up the stores and has even swapped 15 per cent of the books in stock for more populist titles that won't hang around on the shelf as long. Over Christmas, like-for-like sales were up 5.6 per cent, showing the effort is paying off.

The turnaround at Waterstone's and the DVD revolution should propel HMV shares in the coming months. On less than 8 times forecasts of pre-exceptional earnings for the full year, the shares are a buy.

Aga saga begins to run out of steam

Evidence that Aga Foodservice, famous for its Aga ovens, might have been hit by slowing consumer spending failed to materialise yesterday, much to the relief of the market.

Formerly known as Glynwed, the company has undergone a dramatic facelift, transforming itself from an engineer into a business focused on supplying cookers and commercial kitchen equipment.

About half of its sales come from its consumer arm, which sells Aga, Rayburn and Rangemaster cookers as well as paint, tiles and furniture. Its so-called foodservice arm, which sells commercial refrigeration units and bakery equipment, brings in the balance. On the consumer side, it said yesterday that sales of Aga branded-cookers exceeded 9,000 a year for the first time, putting it well on track to reach its 10,000 target.

In the foodservice unit, it said its bakery businesses in both the UK and the US performed well although there was weak demand for big fridges from UK caterers.

The other piece of good news yesterday was the company's cash position, which stood at more than £50m at the end of the year – higher than most analysts' forecasts.

The issue for Aga Foodservice, though, is consumer confidence. The company points out that the Aga shop it opened in Knightsbridge about a year ago has sold twice as many cookers, at some £6,000 a pop, than it originally hoped for. But it must concede that if house prices slow and equity withdrawal slows, the future may not be so hot.

Analysts calculate Aga Foodservice made profits of about £34m for 2002 and predict this will rise to about £40m for 2003. That puts the stock, down 6p to 200.5p, on a forward multiple of 9 times, which allows for the possibility of some disappointment. Hold.

T&G likely to remain in the small broker league

At least the pain was shared when Teather & Greenwood, the small-cap stockbroker, announced it was axing its dividend yesterday. Ken Ford, the chairman, and the rest of the board are also deferring large chunks of their salaries until the group returns to profitability. In total, £273,000 was lopped off the board's pay bill in the six months to October. There has been a hair-shirt policy throughout the group and more than £10m of annual cost savings have been achieved, mainly through redundancies.

Together with the decision to pass the dividend, these measures – which also include the recent £3.65m sale of the private client investment management arm, which had been haemorrhaging cash – should put the company back in the black this year. That is despite a £2.6m loss in the first half, down from a £1.1m profit last time.

Mr Ford thinks small stockbrokers such as his will be able to pick up business as the mid-sized players, such as ING, scale back. Ironically, T&G's own broker is ING and yesterday's redundancies at the Dutch-owned bank have left T&G without an analyst to distribute research on the company. That doesn't bode well for getting investors interested in T&G shares. Down 1.5p to 21p yesterday, they are a fraction of their boom-time price.

Maybe the cost cuts will be enough to ensure T&G maintains its position until market activity and flotations in particular show signs of a rebound, but investors need not bet on the shares until then.

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