Kingfisher back on top but investors should look ahead

Investment Column

After the disasters of 1994, when Kingfisher's shares almost halved from 772p to 389p, chairman Sir Geoff Mulcahy will be forgiven a smug smile over the recovery at the Woolworths and B&Q group. The shares have been rising steadily for the past two years and jumped another 22.5p to 697p yesterday on the announcement of record sales and profits which hit pounds 388m in the year to last month.

Every division apart from Darty, the French electrical retailer, posted record profits, with B&Q, Comet and Woolworths the star performers. B&Q benefited from the improving housing market, better cost control and lower levels of shoplifting. Comet rode on the back of strong sales of multimedia PCs. Woolworths' 29 per cent increase in profits to pounds 84m was helped by lower costs and strong growth in toys and housewares. Its own labels such as Chad Valley toys and Ladybird children's clothing also did well.

It was clearly a bumper set of figures, but investors need to look forward and the picture from now on may not be quite so rosy. Kingfisher broke with tradition last year and included a trading update in its annual figures, largely because the like-for-like sales numbers were very good. There were no figures this time which may mean that the growth is not so good as the 7.4 per cent achieved during 1996.

One of the main problems is Darty, which has struggled in a difficult French market and was further wounded by the strength of sterling.

As Kingfisher also owns a 26 per cent stake in But, another French retailer, France accounts for 30 per cent of group profits.

The French electricals market fell last year and is predicted to be tough again this year. Like-for-like sales increased by just 2.2 per cent and profits were flat at pounds 113m. Because of the way Kingfisher accounts for currency fluctuations any improvement this time could be wiped out by the strong pound.

With the domestic businesses moving along smoothly Kingfisher is now starting to look for new markets overseas. The first is Taiwan. One B&Q opened there last year and a further two will be opened this year. The opening of other formats such as Woolworths and Comet is being considered while expansion into other European markets is also likely.

On the acquisitions front, a Wickes deal looks to be on the back-burner while interest in the Littlewoods stores might be confined to a few sites.

With NatWest forecasting profits of pounds 430m this year the shares trade on a forward rating of 15.

That represents a small premium to the market and, after a strong run, the shares now look to have travelled far enough.

Chubb bid key to Williams

Williams made a forecast of yesterday's 1996 profit figures a month ago when it announced its pounds 1.3bn agreed bid for Chubb, so there were no surprises in the results. They were none the less good figures, showing a 15 per cent increase in underlying operating profits which were further boosted by disposal profits on the sale of the group's electronics and UK building products companies to give pre-tax profits up 49 per cent to pounds 340m (pounds 228m).

Earnings per share last year of 39.1p were equally distorted by the disposal proceeds, but the underlying picture showed an 8 per cent increase from 22.3p to 24.1p. The total dividend rose from 14.25p to 15.05p.

So far so good but, in the context of the proposed bid for Chubb, last year's figures are really only a side-show.

Worries about the deal include the likelihood of an MMC reference, the apparent departure from a previous strategy of small infill acquisitions, the steep price being paid, the danger that not underwriting the deal opens Williams up to seeing the value of its offer fall, which might attract a counter bidder, and the probability that in the short term at least it will destroy shareholder value.

They are real concerns, but should not distract from the fact Chubb represents a one-off opportunity for Williams to complete the transition from unfocused conglomerate to genuinely global specialist manufacturer of security and fire protection products. It will gain a real toe-hold in the fast-growing economies of the Far East.

At yesterday's close of 334.5p, up 5p, the shares have recovered almost all the ground they lost after the City's churlish initial reaction to the deal and now trade on a prospective price-earnings ratio of 14.2 on the basis of forecast underlying profits of pounds 301m. Once the benefits of the Chubb deal kick in during the following two years, that rating falls to 12.1 and 10.3 while the gross yield on the shares moves ahead from 6.0 per cent this year to 6.3 per cent and then 6.7 per cent. That is good value.

UniChem's second half stagnant

UniChem is now in third place among UK chemists chains since Gehe pipped it in January in the year-long marathon bid battle for Lloyds Chemists. But despite having to write off a chunky pounds 13.2m for the cost of the battle, it was probably wise to walk away from Lloyds, where the Germans are going to have to work hard to justify their pounds 684m bid.

That said, UniChem will need to be equally energetic in convincing the City it has an exciting replacement strategy up its sleeve. Excluding the bid costs, pre-tax profits rose an unexceptional 8.3 per cent to pounds 53.5m in the year to December, bang in line with the forecast made two months ago, while "clean" earnings, up 6.3 per cent to 20.2p, seem to have stagnated in the second half.

The core drugs wholesaling operation seems to have been particularly badly affected. Underlying the 5 per cent profits growth to pounds 40.9m was a flat 3.1 per cent operating margin, the first time anyone can remember returns not growing.

High-margin toiletry sales continue to be creamed off by the supermarkets, leaving the running to be taken up by low value-added hospital supplies. But last year's sub-market growth of 7 per cent in medicines, the mainstay of the business, has accelerated to 10 per cent in the first two months of 1997. UniChem is suggesting it is ready to expand the wholesaling business into Europe.

Even so, the Moss Chemists chain looks more exciting, turning in half the growth in group operating profits last year. The target is to spend up to pounds 50m raising the current chain of 459 by around 100 this year - still less than half the size of Gehe in the UK. Beyond that, the survival of the health bill means UniChem can push ahead with plans to link up with doctors' surgeries.

The group is, naturally, unworried by the Gehe threat and Collins Stewart is looking for profits of pounds 61m this year, putting the shares, up 12.5p at 260.5p, on a lowly forward multiple of 12. Unexciting even so.