Scotsman - One to Watch
09 September 2009
The General Retail sector has performed well this year driven by higher than expected consumer spending, due to lower mortgage rates, and the recovery in the housing market. Another theme this year is the fact that the equity issuance has been taken as a positive as the market has responded well to stocks which have been seen to address their balance sheet/debt issues. One stock which benefits from all of the above is DSGI, formerly known as Dixons.
Dixons had an appalling time last year and saw its share price fall from 79p to just 12p due to concerns about trading and its weak balance sheet. It has since raised £311m through a rights issue and renegotiated its debt, and as such any financial concerns have eased significantly.
In terms of trading DSGI benefits from better consumer spending and a recovering housing market, which has led to improved sales of white goods such as washing machines and fridges.
However, the real upside in the stock could come from the store refit programme, led by the new management team. DSGI aim to upgrade 50% of their Currys and PC World stores by the end of 2011 and so far the results have been encouraging. Gross profits have increased by between 15 and 50% subsequently.
There are also still opportunities for management to improve the bottom line through further cost savings and less discounting. All of this gives the potential for the company’s earnings to grow by a factor of 4 to 5 times over the next three years.
The stock currently trades on a very low valuation of 0.2x EV/sales which suggests the market is not yet discounting the very significant upside.
Karen Robertson, Manager of the UK High Equity Income Fund, Standard Life Investments
This article was first published in the Scotsman on the 11th September 2009.
