Bottom Line: Kwik Save still good value

KWIK SAVE grew through the fat years, continued to flourish in the recession and, according to Graeme Seabrook, the outgoing chief executive, will carry on pleasing the market when things pick up. Yesterday's interim figures suggest he is right.

Pre-tax profits rose an appetising 19 per cent to pounds 61m from sales 14 per cent higher at pounds 1.5bn. Earnings per share of 26.5p matched the profits rise with the dividend not far behind at 5.4p, a 15 per cent improvement. All those measures have been moving ahead nicely for the past 10 years.

Continued progress is testimony to the decision five years ago to widen the range of lines offered. Stocking 600 lines when the superstores had 3,000 was viable in the early 1970s but meant corporate suicide in the late 1980s when the big grocers had expanded to something like 15,000.

Keeping pace with customer expectations meant a massive investment in scanning technology (checkout staff can only remember so many prices), which is now complete. Greater efficiency has allowed costs as a percentage of sales to fall again and sales per square foot are on the increase. Kwik Save now claims 9.7 per cent of the packaged grocery market compared with 8.5 per cent a year ago. When Mr Seabrook took over in 1989 the figure was 6 per cent.

Kwik Save is adding a new store every week. It can afford to because the average store costs pounds 1m to open, compared with pounds 25m for a big out-of-town superstore. An average return on capital of nearly 40 per cent is the best in the sector and, best of all, it is all paid out of cash flow.

There are risks ahead. A new chief executive arrives in June, although he has a fine record in discount retailing. Taking on the Scottish market is a big challenge. And foreign discounters and warehouse clubs are eager for a slice of the lucrative UK market.

That's reflected in the price, though. Expected full-year profits of approaching pounds 130m put the shares on a prospective p/e of 14, which for a self-funding growth stock is undemanding. Good value.