Shares digital

KESA Electricals (KESA) – 208p, stop loss 166p

SHARES SUMMARY

Discussions to sell French furniture business could be precursor of a juicy cash return, topping up an already plump dividend yield.

Business:

Europe's third largest electrical retailer.

Vital stats:

Market value: £1,096 million

Historic PE 2006: 10

Prospective PE 2007: 9.5

Prospective PE 2008: 8.8

Sector PE (next 12 months): 17.4

1-month relative strength: 6.4%

1-year relative strength: -34.1%

Yield 2007: 6.4%

NMS: 18,750

Spread: 0.23%

It is always interesting to see a stock go up after it publishes moderate or weak numbers, especially if the shares have done badly going into the figures, as this suggests a lot of bad news has already been discounted. KESA Electricals’ share price bounced last week even though Friday's trading update for the year which ends on the 31st of this month was hardly packed with good news.

KESA reported sales growth for the period 1 November to 8 January of 1.7%, on a like-for-like basis. French electricals arm Darty showed 2.2% growth, the UK's Comet 0.7% and French furniture unit BUT a 0.7% decline. Chief executive Jean-Noel Labroue referred on more than one occasion to 'difficult' and 'very challenging' conditions in the UK in particular.

But after DSG's (DSGI) statement of 3 January none of this was exactly a shock, since KESA's stock had fallen by 9% since then. Moreover, the shares are already 40% lower than their 360p 2007 high of almost 12 months ago.

A lower exposure to laptops and to the UK, relative to DSGI, were always going to make the numbers look less bad by comparison. But more interesting still is the planned sale for ?550 million of BUT to a consortium consisting of Goldman Sachs (GS:NYSE), Colony Capital and Merchant Equity Partners.

KESA had £155 million of net debt as of last July, although September's acquisition of Spain's Menaje del Hogar has increased this to around £200 million. Even if all of this is paid off, KESA could in theory return £200 million straight to shareholders in a special dividend of some 35p-40p per share. This would represent a yield of 16%-19%, on top of the 6.2% implied by last year's 13.3p-a-share payout.

Buying now for a possible special dividend is high risk, particularly as the disposal is far from a done deal, and the credit and buyout markets remain febrile. But a similar strategy has paid off once this month already.

Those shrewdies who snapped up Reed Elsevier (REL) on 13 December – the day it confirmed its sales of US Harcourt Schools business to Houghton Mifflin Riverdeep Group for $4 billion had beaten the credit crunch – reaped rich rewards. The Anglo-Dutch publisher had consistently stated it would return all of the cash to shareholders once the deal went through and, sure enough, the stock went ex-dividend of an 82p special payment on 7 January. Add this to the 9% rise in the share price between confirmation of the disposal and payment of the dividend and that was a return of 22% in a month. Reed's shares have since slipped back to around the 600p mark, so some nimbleness was needed, but a juicy return was accrued by those who were sharp enough.

The risk of more bad news and earnings forecast cuts remains, even allowing for the benefits of de-gearing on the interest charge. But last year's 13.3p dividend payout is a good starting point and, if that is topped up by a further 35p-40p special divi, it seems logical to expect a run up in the share price as traders scramble to get their hands on this welcome extra cash.

by: Russ Mould