Dixons plugs into new position

THE INVESTMENT COLUMN

Dixons has been a remarkable success story over the past three years since the shame-faced retreat from an ill-fated foray into the difficult American retail market. Don't be misled by the shares' 18p slide yesterday to 409p; these were excellent figures that confirmed the group's success in repositioning itself away from a tired high street to popular out-of- town sites and into genuine growth areas such as personal computers and mobile phones.

There were three reasons for the shares' fall: profit-taking after a stunning doubling of the price last year; the traditional January hangover for retail shares; and, finally, what appeared to be a misreading by analysts of the balance between first- and half-year profits.

Although the gross margin slipped a little under one percentage point during the half-year to October (thanks to an increase in lower-margin PC sales), good control of other costs saw pre-tax profits up 41 per cent at pounds 37.5m from a 15 per cent sales increase to pounds 855.7m. At the earnings per share level an impressive 59 per cent rise to 5.9p allowed a 14 per cent lift in the interim dividend to 2.05p.

The recovery at Dixons has been driven by its foresight in grabbing a 40 per cent share of the retail computer market through PC World, the chain that only came into existence at the beginning of 1993 and still has little serious competition.

Although the computer market as a whole grew by 27 per cent last year, the domestic segment romped ahead by more than 70 per cent and shows no sign of slowing.

The other key development has been the well-executed shift of Currys, the fridges and washing machines arm, from the high street to increasingly large out-of-town sites. Currys' newest stores are twice as big on average as Comet's competing shops, which means that it can offer bigger ranges and allow new products to piggy-back on the Currys brand.

Dixons has finally shrugged off the misguided price-led strategy of the 1980s, when a third of its products were own-brand. It now competes on range, value and after-sales service, which it has rightly pinpointed as the route to customer loyalty.

High street Dixons, out-of-town Currys, communications products store The Link and PC World all have discrete, focused markets - at last a sensible strategy backed up by fast-increasing capital expenditure.

How much of this good news is already in the price? On the basis of NatWest Securities' forecast of pounds 138m profits in the year to April, the shares currently trade on 17.5 times earnings, a sizeable premium to the rest of the market. That is justified by Dixons' much better-than-average growth prospects, but yesterday's share price hiccup suggests that investors have enjoyed the best of the run.

Cost-cutting

bolsters Savills

Strong management through one of the worst property recessions this century has stood upmarket estate agent Savills in good stead. Decisive action to cut costs helped to reverse pounds 4.5m of losses chalked up in the early 1990s and its luxury residential and agricultural businesses have helped it to weather the commercial property downturn.

That strength is reflected in yesterday's half-year profits, which dipped only slightly from pounds 1.9m to pounds 1.84m in the six months to October, despite the continuing dire state of the commercial market. But trading profits have been on a plateau for the past two years and the company looks to be heading for a third, judging by yesterday's warning that the full 1995/6 results are unlikely to rise above last year's.

The problem is that the commercial side, the powerhouse of the 1980s, has become a drag in the 1990s.

Operating profits in the half-year sank from pounds 916,000 to pounds 624,000 and a lot of the business is only marginally profitable.

Things would have looked much worse without the fees from handling a pounds 125m deal involving the sale of a central London property portfolio belonging to Scottish Amicable to a German investor during the period.

Aubrey Adams, managing director, believes the market could pick up quite fast if current institutional talk about investing more in property is translated into action. But in the meantime, Savills must rely on its other activities to deliver growth.

Profits in agricultural and residential property are up healthily from pounds 658,000 to pounds 1.04m in the six months and the outlook seems set fair.

Demand for homes in the range from pounds 450,000 to over pounds 5m, in which Savills specialises, remains strong and Mr Adams believes the resilience in farmers' incomes will continue into 1996, underpinning the agricultural market.

More questionable is the funnelling of much of Savills' extensive cash resources into what looks like a rag-bag of financial services operations ranging from leasing to stockbroking. Together with holding company costs, these clocked up losses of pounds 177,000 in the latest period.

The shares, down 5p at 57p, reflect the uncertain outlook on a prospective price/earnings ratio of 10, assuming unchanged profits of pounds 3.5m this year. Strengthened by the appointment of former Meyer International chief executive Richard Jewson as chairman last year, Savills remains a high-quality punt on the sector, but only for those who see an upturn in commercial property around the corner.

Vibroplant sells off US division

The market warmed to news yesterday that Vibroplant, the Yorkshire- based plant-hire group, had sold its American Hi-Lift division. The $68.8m (pounds 44.4m) deal, including the assumption of $22.3m in debt, was comfortably ahead of book value and better than analysts were expecting when Vibroplant announced its intention to sell in July. The shares responded accordingly with a 7p rise to 81p.

The sale leaves the company financially very strong, wiping out debt and leaving it with cash backing amounting to over 43p a share. It is a windfall which Vibroplant might do well to sit back and ponder before rushing out on a spending spree. Yesterday, Jeremy Pilkington, the chairman, was revealing little about how soon a home would be found for the money, beyond saying that the intention was to focus on growth opportunities in the UK.

After achieving something approaching go-go status in the 1980s - with profits peaking at pounds 14m at the end of the decade - Vibroplant has fallen badly from grace in the 1990s. Part of its problems have been due to ill- judged acquisitions. The US business, built up in the 1980s, was at the root of a good deal of the difficulties. Senior management was distracted trying to sort it out and it has only recently come into real profits, recording pounds 1.4m on turnover of pounds 29m last year.

At home, diversifications like the Alphabet Event Hire operation acquired in 1992 have been equally poor, although with less severe consequences.

But management will surely be tempted to diversify away from its current range of activities. The outlook for the core business, hiring out compressors, dumper trucks and the like, continues to appear bleak, given its dependence on depressed markets like housebuilding and road building. The company has already moved to shake up the UK activities, centralising controls to tighten management.

Even so, analysts are still looking for profits to fall next year, on top of a downgrade following yesterday's sale. A figure of pounds 4.75m this year is expected to be followed by less than pounds 3.5m next, putting the shares on a prospective price/earnings of 17. Expensive.