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JD Sports shares still have further to run

IMI nearing the peak; Synergy Healthcare worth following

Friday 21 June 2002 00:00 BST
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JD Sports, self-styled King of Trainers, is a business firmly on track. Profits are running more than 20 per cent up on last year and the retail group has just won the race for First Active, the sports and fashion business sold by Blacks Leisure, which has pumped JD up to twice its former size.

The £53m debt-funded acquisition should provide a fillip to JD's already impressive earnings growth over the medium term. First Active has been poorly run, and sales in the weeks before JD took over were down more than 6 per cent on the previous year. Operating margins have also been appalling, some 2.4 per cent, compared to JD's 8.3 per cent. The idea is that JD's respected management will spruce up the stores, improve the product mix, and use its new buying muscle to get better deals from its suppliers.

Management says it will not fully integrate the new acquisition, but rather run it as a separate business and keep all the existing store formats, which include Active Venture and Pure Woman. There are also no plans to close any of the 100 ex-Blacks stores in areas close to existing JD Sports outlets. Management seems content to run a portfolio of brands which, in the long-run, is probably the safest strategy for retailers, vulnerable to changing fashions.

The core JD chain is expanding fast and performing handsomely. Pre-tax profit was up 21.3 per cent to £20.4m in the year to 31 March, and like-for-like sales growth has been 3.2 per cent since the financial year end. That is a respectable number against strong comparatives. There is plenty of scope to meet its target of doubling the number of core JD stores to between 300 and 350.

The worry is that the group's shares are vulnerable to delays in the turnaround of First Active. The pressure is certainly increasing now that UK retail sales are slowing. Footwear and clothing sales were down more than 5 per cent, month on month, in May, according to data yesterday.

With the shares trading at a cheap 9 times current year earnings, they are well worth holding despite the threatened consumer slowdown.

IMI nearing the peak

Shares in IMI, the fluid controls business, have done well this last year, as the market takes kindly to the emerging shape of the group.

IMI's products, such as pipes and valves, control the flow of fluids in things like drinks dispensers. Under Martin Lamb, who has been chief executive since the beginning of last year, it has moved to become more focused and to shift production to lower cost countries. Its building products division, which makes pipes, is earmarked for sale.

The restructuring gave Mr Lamb heart to say, in a trading update yesterday, that things will improve in the second half of the year, even though demand in the first half has remained subdued. He said that profits for the six months to 30 June would be 5 per cent lower than in the period last year, although well ahead of the second half of 2001. This was better than many of the expectations in the City. ABN Amro, for instance, had been expecting a 14 per cent reduction. The company added that, for the full year, it was expecting "progress" on 2001, although ABN is still expecting a 4 per cent year-on-year decline in operating profit. The problem is the continuing general economic slackness.

IMI said: "We said in May it was too early to judge whether there would be any volume improvements later in the year, and this remains the situation." The main worry is that the company's building products division will be comparatively late out of the economic downturn ­ as has been the case in previous cycles.

IMI shares closed up 2.5p yesterday at 314.5p, close to a year-high. ABN forecasts full-year earnings of 23.2p a share, putting the stock on a forward multiple of 13.5 times. That's not compelling value, given the good run the shares have enjoyed and the continued depressed state of its markets.

Synergy Healthcare worth following

Here's a chance to grab back some of the tax the Chancellor plans to take to pay for the NHS next spring. Take a look at shares in Synergy Healthcare, which is one of dozens of interesting small-cap plays on the coming surge of spending on improving efficiencies in the health service.

The company, which floated on the AIM market at 180p last summer, provides a raft of hygiene-related services to NHS Trusts. Synergy calls them "sterile services". These range from the low tech (doing the laundry) to the ultra-high tech (software for tracking sterile instruments used in operating theatres). The NHS has a particular problem with ensuring surgical instruments are properly sterilised and, given public concern over the issue of hospital bugs, Synergy reckons outsourcing the management of surgical instruments will be seen as the answer. The group has bought a rival, a subsidiary of Hays, to become number one in operating theatre services.

Synergy's maiden full-year figures yesterday (representing the period before the acquisition) showed profits up 45 per cent to £1.5m on turnover up 18 per cent to £12.7m for the year to 31 March.

The shares were up 6p to 210p yesterday. With the house broker predicting 9.7p of earnings this year, they are fairly valued, particularly given the capacity for disappointment in the software or environmental divisions, but the stock is worth following.

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