Full-year results from the Human Screen

The Human Screen is bored to the marrow by electrical retailers. Kesa might be a turnaround, but it’s not an obvious one.

Highlights

• Adjusted operating profit down 34%
• Adjusted return on tangible assets: 9%
• Adjusted net profit of '33m compared to net cash flow of '17m (-'49m after net capital expenditure)
• Net debt '125m compared to net cash in the previous year of '118m, 9% of tangible assets ('521m after pension deficit of '70m and minimum operating lease commitment of '327m)
• Per-share dividend halved

The Human Screen comments:

At the end of the month Kesa is changing its name to Darty, the name of its iconic (in France) brand.

The Human Screen is bored to the marrow by electrical retailers. Here’s a market that almost exemplifies perfect competition. Gone are the days when retailers explained the technology. Now the customers, armed by reviews on websites and information hoovered from bulletin boards know what they want. How’s Kesa to stand out? Don’t expect the Human Screen to tell you, he’s hoping Kesa’s filings will tell him!

But before the results, the Human Screen will take this opportunity to rant once again about a deficiency in the rules that allows companies not to report lease commitments (rent) in their preliminary results. Since he regards lease commitments as a kind of debt, which touches on almost all his calculations, without this information the statements are almost useless.

Since Kesa has sold Comet, the UK electricals chain, operating lease commitments are far lower than in the previous year. Kesa mentions a figure of '327m, which the Human Screen assumes is the minimum commitment. Nevertheless he’s adopted it, as it’s the only available figure. Proper analysis must wait for the annual report.

Kesa retained one bit of Comet, though, it’s pension obligation. Added to Kesa’s pension obligation it produces a liability of '70m, which the Human Screen will also treats as part of net debt.

The Human Screen has taken a benign view of Kesa’s operating profits by excluding the losses made by Comet and exceptional costs incurred by its developing businesses: Darty Italy, Darty Turkey, and Darty Spain. Without these adjustments, and some smaller ones, both the continuing operation and Comet made operating losses.

Perhaps the French are less clued up, or Darty is more entrenched in France than Comet was in the UK. The rationale for selling Comet was recognition that it might not achieve an acceptable level of profit given "the specific competitive nature of the UK market". Kesa is now mainly Darty France, where it operates 224 stores, with smaller operations in six other European countries. It’s picked Italy, Spain and Turkey to grow the Darty brand because they are large markets at an early stage of consolidation and where the Internet is less significant. Less competitive markets, then, where Darty stands a chance of becoming a major player.

The Human Screen thinks the company is potential recovery stock, but in such a competitive business, at such a difficult time, it’s too risky.

He wouldn’t even consider judging its value by its earnings, the numbers have so little meaning, and since Kesa is in negative equity (liabilities exceed assets) there’s no obvious asset value either.

Curiously, though, it owns a third of its French stores, valued on the balance sheet at '140m, but really worth '350m.

Valuing the property at its market value instead of book value means the shares are selling at three times adjusted tangible book value.

More on Kesa

LON:KESA

HS+ (worth watching for improvement in fundamentals/price)