Industry News

LONDON (ShareCast) - 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.

'We would caution against any extrapolation of such positive sales 'surprises', mindful of rising unemployment, still subdued consumer confidence/sentiment, and the re-introduction of 17.5% (currently 15%) VAT from January 2010,' the broker states.

The broker notes that the sector has underperformed the FTSE All Share (news) by 5% over the last month though enthusiasm for those companies deemed to be financially stretched remains strong, as refinancing worries recede.

DIY retailer Kingfisher (LSE: KGF.L - news) is the highest scoring 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.'

'Excluding 'financially at risk' outliers, forward PERs [price/earnings ratios] range from 6x for GAME Group (LSE: GMG.L - news) (Hold) and JD Sports Fashion (LSE: JD.L - news) (Buy) to 31x for Carpetright (LSE: CPR.L - news) (NB, history teaches that this stock significantly underperforms in the 12 months after the trough in UK mortgage approvals achieved in June),' Charles Stanley said.

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.'