Home Retail Group under pressure

Home Retail Group will announce its third-quarter revenue on 14 January, and a recent profit warning and takeover bid will put more attention on the figures. 

Source: Bloomberg

The company will reveal its full-year figures in April, and dealers are anticipating revenue of £5.77 billion and adjusted net income of £79.9 million. These estimates represent a 1% rise in revenue and a 12% drop in adjusted net income. The company reports its second-half results on the same date and traders are expecting revenue of £3.16 billion, which compares with the second-half revenue of £2.6 billion.

The profit warning from Home Retail Group in October left the company vulnerable for a takeover bid. Even though it knocked back Sainsbury’s bid, the supermarket has until 2 February to make a concrete offer or else walk away from the deal for at least six months.

Argos is still going through its transformation process, but the additional cost of the same-day delivery service tripped the company up. Falling sales of electronic products made matters worse for Argos, and the increasing popularity of Black Friday in the UK made the Christmas spending period harder to predict.

Homebase, Home Retail Group’s other business, is also undergoing restructuring as more store closures are on the horizon, and profit margins fell in the first-half.

Sainsbury’s sold the Homebase business to Home Retail Group in 2000, and it is believed it would sell it again if the takeover goes ahead, due to its interest in Argos. Mike Coupe of Sainsbury’s feels that closing more Argos stores and pushing the click and collect service would be beneficial to both, as Sainsbury’s supermarkets would also act as the collection point.

Equity analyst are bullish on Home Retail Group, and out of the 17 ratings, seven are buys, six are holds and four are sells. The average target price is 135p, which is 4.25% below the current price. 

  Forward 12M Price/Earnings Price/Book value Dividend Yield 5 Year Dividend Growth
Home Retail Group 15.09 0.45 2.86% -23.71%
Kingfisher 16.03 1.3 3.3% 12.77%
Dixons Carphone 16.52 2.03 2.16% N/A

Looking at the forward 12-month price earnings/price ratio for Home Retail Group, it suggests the company is undervalued, and the very low price/book value figure confirms this. It is no wonder the company is a takeover target. Home Retail Group has a respectable dividend yield compared with its peers, but the contracting growth rate over the past five years is concerning especially against the backdrop of a profit warning in October 2015.

Technical analysis from Joshua Mahony MSTA, Market Analyst at IG

The year 2015 saw Home Retail Group shares selloff almost 90% of the gains seen throughout the preceding 30 months, with the low of the year being set on 18 December. However, we have since seen a sharp rally, bringing price through two notable resistance trendlines to regain the crucial 152p resistance level.

Looking at these shares from a cyclical perspective, the three years and six months between the November 2008 and June 2012 lows is exactly the time between the 2012 low and the recent December low. This provides further confidence that we are likely to have bottomed out once more. However, the aforementioned 152p resistance level is crucial here, given that it represents both the October 2015 high, and the 200-week simple moving average.

Should we see a daily close above this level, it would provide the necessary signal that further upside is likely, with resistance levels of 175p, 219p and 225p coming into view.

However, given the importance of this 152p level, alongside the fact that we have come such a long way in a short time, a retracement lower is certainly a possibility should we not retake 152p. Support levels of note are 128p and 114p.

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