It’s unsurprising, against the current weak UK economic backdrop, that shares in department store chain Debenhams were priced at the bottom end of the range when the group returned to the London Stock Exchange yesterday.
Shares in the group were priced at 195p, the very bottom of the 195p to 250p range, giving it a market capitalisation of £1.7bn.
But even at this level, they’re still hardly going cheap…
Lex in the FT argued before Debenhams’ flotation that shares in the department store group didn’t look cheap, and it seems the market agreed. But even at a bottom-of-the-range 195p a share, the group is still a long way from the bargain bins.
Although shares trade at about a 20% discount to current high street darling Marks & Spencer (judged by p/e ratio), there are good reasons for that. M&S benefits from a significant property portfolio, whereas Debenhams has sold most of its freeholds.
Debenhams is also carrying far greater levels of debt than M&S. Even after it has used some of the money raised to pay down its borrowings, debts will still be equivalent to around 3.3 times earnings before interest, tax, depreciation and amortisation. That’s compared to 1.5 times for M&S.
And that makes Debenhams’ expansion plans seem even riskier. The group wants to grow its number of stores from about 120 to 340, with a new chain of fashion stores for women. That would be a tough proposition even if the high street was booming. As it stands, UK consumer credit in March grew by just £281m, the smallest increase since February 1994. As John Foley on Breakingviews.com puts it: “Debenhams plans to double in size at a time when the market overall is contracting.” That seems “wildly ambitious.”
Most commentators suggest M&S as a suitable alternative to those eyeing up the Debenhams’ float. But if you really feel you must invest in the UK high street, perhaps you should avoid the fickle fashion sector altogether.
One company mentioned in last week’s issued of MoneyWeek was bicycle and car accessories chain Halfords Group, which Goldman Sachs is keen on. The group benefits from a lack of competition from supermarkets, and also trades at a chunky discount to the overall retail sector. Subscribers can read more by clicking here: Is there still life on the UK high street?
But in general, we’d avoid retail as a sector. Even Halfords might find life tough going if oil prices remain at or above current levels – though you could argue that higher petrol prices might encourage more people to get on their bikes.
Soaring oil prices are even causing problems for oil companies. Royal Dutch Shell’s latest quarterly results show that it is continuing to have problems with its reserves.
The group beat profit forecasts for the three months to March 31, with net income rising to $6.1bn, largely on the back of higher oil prices.
But rising costs for oil services are set to hold back development on some of its more long-term projects. That means Shell is now less likely to hit its target of replacing 100% of its reserves by 2008 – even though its investment budget is set to rise to $21bn in 2007, from $19bn this year.
Ongoing nervousness over Shell’s seemingly endless capacity to surprise the market with bad news means it is trading at a discount to fellow oil major BP. And this latest earnings report will not do anything to persuade investors that the discount should be closed.
For more on oil, and how to profit it from it, check out the latest issue of MoneyWeek and find out why economist James Ferguson reckons oil could hit $90 a barrel by autumn this year. Subscribers can view the magazine online by clicking here: MoneyWeek Issue 280
And if you’re not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the stock markets…
The FTSE 100 gained 26 points to close at 6,036. Mining stocks were among the main gainers, after both BHP Billiton and Rio Tinto said that copper prices were unlikely to fall at current stock levels, while BHP warned that labour disputes and a shortage of equipment and skilled workers are restraining supply growth. On the down side, online gambling group PartyGaming fell 2% to 145p as anti-gaming legislation picked up support in the US. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 rose 39 points at 5,233, while the German Dax gained 70 to close at 6,039.
Across the Atlantic, US stocks hit a six-year high as retail sales grew sharply in April and crude oil prices fell. The Dow Jones climbed 38 to 11,438. Meanwhile the S&P 500 rose 4 to 1,312, while the tech-heavy Nasdaq rose 19 to 2,323.
Japanese stock markets were closed for a public holiday. Elsewhere in the Pacific region, Australia’s S&P/ASX 200 index rose 66 points to 5,255, as booming copper prices sent the mining sector higher once again.
This morning, oil edged higher in New York, trading at around $70.35 a barrel. Brent crude was higher too, trading at around $70.60.
Meanwhile, spot gold set a fresh 25-year high in early trade, leaping to $679.70 an ounce, before easing back to $676. Silver was trading at around $13.88 an ounce.
And here in the UK later today, bankruptcy figures out later are expected to show a continued rise in the number of individuals becoming insolvent in the UK. The number of bankruptcies is already at record levels.
And our two recommended articles for today…
Why something has to give in the global economy
– The current global economic boom has many unusual features, says Marc Faber in Whiskey & Gunpowder. High US debt and the emergence of China are two, but the most unusual is the way that all asset classes, from bonds to commodities, have been rising in tandem. This cannot continue indefinitely – something has to give ‘in a very big way’. To find out which asset class is likely to suffer most, and why, click here: Why something has to give in the global economy
Is China set to drive inflation higher?
– Cheap labour and goods from China have helped keep inflation across the world low in recent years. But China is now changing its focus from expanding capacity to improving profits, says Martin Spring in the On Target newsletter. Global consumers may find that the cheap goods they’ve been taking for granted are no longer available – and that means higher inflation. For more, click here: Is China set to drive inflation higher?