Keep a sceptical hold on Kingfisher

Bus firm Arriva has motored ahead, but far enough for now; Not a good time to play with Game Group stock

Kesa, the electricals group being spun off by Kingfisher next week, has none of the colourful plumage of its feathered parent. More prey than predator, the group's name is an acronym of Kingfisher Electricals SA, not an allusion to Ken Loach's film Kes.

Monday will mark the culmination of Kingfisher's turbulent journey to become a focused DIY retailer. As with Woolworths, Kesa's demerger poses the conundrum for Kingfisher investors of whether to pocket their new shares or seek a quick buck and sell up.

The prospects for Kesa, which owns Comet in the UK, Darty and BUT in France, and Vanden Borre in Belgium, differ depending on whether you view the electrical retailing market as a glass half empty or half full.

The pessimists' case is the easier to make. In the UK, the company faces a slowing consumer market and continued uncertainty as a result of a competition probe into extended warranties - the cornerstone of Comet's profits. Dixons, Comet's main rival, was swift to highlight the public's reticence to splash out on new washing machines and fridges and the market was even swifter to punish it.

On the Continent, where Kesa derives four-fifths of its retail profits, the picture is bleaker. A dire few years for French retailers has punctured profits at Darty, the country's biggest seller of electrical goods. They slid 17 per cent last year and underlying sales and margins are forecast to remain weak for the rest of the year. BUT, which sells mainly furniture, is in similarly poor health.

That said, analysts reckon the sluggish outlook is already priced in, leaving only potential upside from the management's turnaround plans. These revolve around revamping Darty outlets and buying back BUT franchises (Kesa owns less than half of the chain's 239 stores).

Jean-Noël Labroue, the chief executive, may lack experience in the public eye but he knows the business inside out, having been with Darty for more than two decades. The group plans to use its presence in countries such as the Czech Republic and Slovakia as an eventual springboard from which to conquer Eastern Europe.

Kesa's shares are likely to command a price/earnings ratio of around 10 times - a slight discount to the rest of the sector. Its strong cashflow should keep predators, from Dixons to financial buyers, sniffing around while the 5 per cent yield is handy. Existing shareholders should hold but there is no rush to buy in.

Bus firm Arriva has motored ahead, but far enough for now

Arriva, the bus and train operator, reassured the market that all was well yesterday in a trading update ahead of interim results.

The group announced that the disposal of its motor retailing operations is close to completion. That should raise some £70m, which is a bit more than analysts were expecting. The company has been selling off non-core assets and is now well focused on its chosen business areas.

The company's strategy is to invest in the UK and Continental Europe and stay out of North America and the Far East, where some of its rivals have come unstuck. Given the economic liberalisation process on the Continent, which throws up good opportunities, this seems like a fair strategy.

The company is in six Contintal countries, including Italy, which it entered last year, and Portugual, where it expanded its operation in 2002. Last year some £300m of its £2bn in revenues came from the Continent.

In the UK, it has two rail franchises, though one of those (Merseyside) is about to end. It is in the bidding for four others, so it remains committed to the rail sector - it is in the final bid stage for the Wales and Border franchise.

In UK buses, it is in a strong position as the joint number two, with Stagecoach, behind market leader First Group. Arriva is the biggest bus operator in London.

The company said it wants to pull off more acquisitions - it is thought to be targeting the European bus sector.

Analysts believe full-year profits will be down some 15 per cent on the previous year, at some £85.8m or 32.7p a share.

The shares have motored from 259.5p in February and closed up a further 7.25p yesterday at 345.75p. On a forward multiple of 11, the shares are not expensive and there's also a 5 per cent dividend yield to consider. Hold.

Not a good time to play with Game Group stock

The grim news continues to roll at Game Group, the high street retailer of computer games, after a December profit warning saw the stock more than halve.

Like-for-like sales across all of the Game Group stores in the 21 weeks to 28 June were down 2.9 per cent on last year.

Admittedly, the company was up against tough comparisons.

Last year, sales were 34 per cent ahead on a like-for-like basis - buoyed by the launch of the Xbox games console from Microsoft and the GameCube from Nintendo.

However, the company's performance has deteriorated even since April.

In the 12 weeks to 26 April, overall sales were up by 10 per cent with same store sales up by 1 per cent.

As ever, Christmas is the key trading period for Game Group. However, consumer confidence remains sluggish and potential blockbusting titles, like the latest Tomb Raider game, keep slipping.

Analysts are predicting that the business will make a pretax profit of around £31m this year. That puts the stock - down 1.75p at 54.25p yesterday - on a forward rating of nine. Not worth chasing.