Broker snap: Home Retail feeling the heat

21st Oct 2009 13:09

Results from Argos and Homebase operator Home Retail were slightly ahead of expectations, but that has not stopped Seymour Pierce from issuing a recommendation to sell the shares.Adjusted profit before tax of £123m was £2m above market consensus, though earnings per share at 9.6p were below market expectations of 9.7p.Seymour Pierce believes the stock is 'more than fairly valued' at 15.9 times projected earnings for fiscal/2009/10.The broker has issues with the company's reliance on the UK market, and suggests that the Argos retail model does not seem to be replicable overseas. Additionally, the deteriorating margins the group's businesses are experiencing indicates that Argos and Homebase are feeling the heat from their competition.'Argos, which will benefit from capacity coming out of the market, is facing growing competition from the food retailers, which are ratcheting up their non food effort, and from a better performance from the electrical retailers, in particular DSG International,' Seymour Pierce notes. 'Homebase is becoming more dependent upon the discount weekends while competitor, Focus DIY has survived and could become a more credible competitor,' the broker added.Singer Capital Markets is a little kinder. Though it has no rating for the stock, the broker said that 'whilst the favourable weather conditions in the half have acted as a slight tailwind to this performance, the measures taken to control costs have proven very effective.''The strong cash generation and conservative capital structure leaves the group well positioned,' Singer reckons.