UK Edition
Questor: in the coming recession discounters should do well. Time to buy B&M
Questor share tip: the chain is better placed than those that have closed completely or gone online-only
Shopping remains limited during the lockdown and so does what shareholders are being allowed to put in their baskets.
Most of the major insurers recanted on dividend plans last week after the Bank of England urged restraint but supermarket group Tesco pressed ahead with its £900m payout for the year to February despite taking advantage of a business rates holiday.
Rarely has capital distribution made such headlines. Conserving cash seems sensible – unless you are an income investor who relies on divis.
Deferrals could mean improved payouts down the line but directors know that unwinding government help is going to be every bit as sensitive as deciding how and when the lockdown should end. It is trickier because, as Tesco has shown, the crisis touches two financial years.
The debate should remind investors that there are no forgone conclusions right now. Markets have begun to rally but the coronavirus fallout is far from over. Those with cash to deploy can only hunt out businesses with sound balance sheets, good management and momentum.
Falling squarely into that category is B&M European Value Retail, which next Friday is due to pay a special 15p-a-share dividend with little controversy because it constitutes the proceeds from the sale last month of its distribution centre freehold in Bedford.
The discount chain, known for groceries, pet supplies, cleaning materials and toiletries, has been granted essential status to continue to sell about 70pc of its range, closing only a small number of small-format stores, protecting staff and getting used to bigger baskets and lower footfall.
This weekend Easter-themed paper plates, napkins and cutlery holders all priced at a pound or less are helping it break even for now, the City estimates. The sluggish pre-Christmas trading seems like a long time ago.
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B&M’s first shop opened in Blackpool in 1978 but its modern history began in 2004 when brothers Simon and Bobby Arora bought the chain. With the backing of private equity firm Clayton, Dubilier & Rice, expansion accelerated.
B&M debuted on the stock market in 2014 and opened its 600th store in 2018. It had 620 in the UK as of this time last year and is plotting a path to 950 in all. It aims to build a general retailing version of Primark, which has thrived on fast turnaround and plenty of in-store variety, keenly priced.
The Arora family still own 15pc of the business and the chairman is Peter Bamford, once Vodafone’s marketing chief.
B&M has thrived at home but overseas expansion has been mixed. A German division was sold in March. The Babou chain in France, acquired in October 2018, is currently closed but looks a more promising prospect.
Provided that the business rates holiday continues beyond the shutdown, analysts at HSBC forecast that B&M will end up £80m worse off, with £25m of that offset by the removal of German losses.
One variable for the rest of the year is preparation for the winter “golden quarter”, which depends on placing orders with Asian homeware suppliers as early as May. But it is better placed to bounce back than rivals that are completely closed or have reverted to online sales only.
Company followers at Peel Hunt, the broker, expect B&M to hardly miss a beat, with operating margins forecast to rise from 7pc in the year just gone to 7.6pc and then 7.9pc in 2022. The group’s borrowings are comfortable at about a third of the level that its banking covenants currently permit.
The shares had a good week last week, touching the price at which Questor last looked at the stock in January 2017, when readers were advised to take profits. The world is much changed since then.
Beyond the immediate crisis to the recession that lies ahead points to a time when discounters traditionally fare well. Given the renewed focus on the importance of high street infrastructure, it could even be coupled with a more enlightened approach to taxation for retailers.
B&M shares trade at 12 times forecast earnings for the financial year just begun and 10.6 times next year. They are worth putting in your basket.
Questor says: buy
Ticker: BME
Share price at close: 300.1p
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