Broker tips: Game, general retailers, Safestore

1st Sep 2009 13:24

Charles Stanley has reiterated its cautious stance on the UK general retail sector and warned against reading too much into what are likely to be good fourth quarter year-on-year sales figures, as most retailers will be going up against soft comparatives.DIY retailer Kingfisher is the highest scoring retail stock on the broker's technical stock screen, a system which uses a weighted points scoring system based on numerous key performance indicators, including price to book ratio, earnings growth, expected margin and asset turnover improvement, and expected improvement in net debt and cash flow.The stock's performance is 'historically correlated to UK mortgage approvals and residential property transaction completions which seem to have started rising again,' the broker said, adding that 'the catalyst for outperformance may well be Kingfisher's interims on September 12.'The sector as a whole 'is not cheap' in the broker's view, 'trading at a median forward year PER of 14x and EV/EBITDA multiple of 7x.'The share price of video game retailer Game Group edged higher on Tuesday morning on rumours that Nintendo may respond to Sony's price cut on the Playstation 3 with a price cut of its own on the Wii.David Stoddart, an analyst at Altium Securities, said his sources suggest the recommended retail price of the Nintendo Wii will be cut from £199 to £149. Sony's price cut on the Playstation 3 has already been matched by Microsoft for its X-box gaming console. 'Clearly these companies' [Sony, Nintendo, Microsoft] models suggest that the price cuts will drive sales. This will benefit the retailers also. Even if percentage gross margins suffer because of a mix shift towards hardware, cash gross profit should increase,' Stoddart suggests. If the price cuts expand the user base of the machines then retailers such as Game should ultimately benefit from increased sales of higher-margin software.'This is further good news for Game. It remains one of the cheapest retailers in our coverage. On an ex-cash basis, it's PE ratio is only 5.4 times,' Altium said. Altium rates Game's shares as a buy.Shares in self-storage companies have yet to fully benefit from the recent market rally, according to KBC Peel Hunt, and the broker believes that after its trading update on Tuesday morning, shares in Safestore, the UK's largest operator, look a bargain.The broker notes that Safestore's gearing, at '112% net debt/equity at the half-year' is higher than its sector peers but KBC considers this appropriate for the group's expansionary business model.'There is 20% headroom on the capital value of UK assets before loan-to-value covenant breach, significantly more than the 7% fall we anticipate over the second half,' the broker added.The broker has left its full-year estimates unchanged after the trading update, and forecasts an adjusted net asset value (NAV) per share of 177p for the end of October, which it reckons will be the low point of the cycle. The shares are currently trading some 26% below this level, underpinning KBC's buy recommendation on the shares.