FCCN

Following the continued weakness in French Connection (FCCN) David Stoddart of Altium upgraded the shares from ‘sell’ to ‘hold’ – in itself scarcely a ringing endorsement. The change is due solely to the fact they have now fallen to his price target of 63p.

Stoddart’s forecasts are based upon the assumption the second half of this year and the first six months of 2009 ‘will be worse for retailers’. However, he does admit ‘it is not within the bounds of possibility that further sales weakness could trigger forecast reductions’.

Currently the shares are selling well below their end-FY2009 estimated net asset value (NAV) of 117p. The year-end cash balance of 47p is equivalent to 75% of the share price. Even if all fixed assets are eliminated from the NAV there would still be a NAV of 83p, which would ignore that the stock is worth well above its balance sheet value as French Connection still enjoys ‘healthy margins’.

The reason why Stoddart has a target price ‘well below the asset value’ is simply he does not believe underlying value will be unlocked by corporate activity. Stephen Marks, the founder and executive chairman, still holds 41.8% of the equity despite selling 8.89 million shares four years ago at 410p. The unfortunate Baugur has 20% bought at much higher prices. Marks’ stake blocks any corporate activity of which he does not approve. This veto has prevented Baugur from using their holding as the springboard for any deal. Instead the losses it suffers have continued to grow.

Stoddart is forecasting an uncovered 5p dividend providing an 8% yield. The price/earnings ratio is, however, a stratospheric 31.2.

by John Marshall