Thursday, September 13, 2012

Thu 13 Sep - Part 1 - HOME

Good morning. Lots of results again today, so I'll only be able to cover some of them. The most important one (by far) for me is Home Retail Group (HOME). As regular readers will know, it's one of my main share picks, where I identified the deep value in the balance sheet as a catalyst for a re-rating once the trading position stabilised. HOME shares provided a tremendous, and illogically priced bargain at around a 70p double-bottom earlier this year.

They have since rallied to around the 100p level, and I suspect today's Q2 Trading Statement might well provide the catalyst to take the shares up to 120p+ in the coming weeks.

As I hoped, trading has indeed stabilised, in fact the key like-for-like ("LFL") sales measure - which strips out the impact of new store openings, closures, and refits/expansion of shops - has actually turned positive in Q2, by 1.4%. This comes on top of a broadly flat LFL sales performance in Q1 of -0.2%.

Gross margins were down slightly, by 75 basis points (e.g. that means a move from, say 40.5% to 39.75% - made up numbers, just to explain the basis points principle to anyone not sure of the terminology).

These are my back of the fag packet calculations, to examine what effect the change in LFL sales & gross margin has on LFL gross profit. Pleasingly, it shows that the Q2 overall position is improved from Q1 slightly.
I couldn't copy paste my spreadsheet here, so here is a link to the spreadsheet on GoogleDrive.

As one of the brokers covering HOME pointed out last week, if HOME can at least show a stabilisation in trading (which it has), then that should trigger a further re-rating of the shares. This is because, even after the strong recent rally, the market is still only valuing HOME at average net cash + debtors. Thus valuing the operating businesses at nothing! Given that we now know trading declines have been cyclical, and not structural, that is a nonsense, and the shares should be significantly higher.

Also note that Argos continues to win the internet war, with multi-channel sales now up to 52% (from 47% last year). So I remain of the view that HOME is the cheapest internet retailer out there, and remains a bargain in my view. Remember you heard it here first - I've been banging on about this since June, so nice to see the brokers catching up!

More later, gonna publish this just before mkt opens.

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