This year promises a deluge of retail IPOs as companies seek to cash in on the sector's surging share prices. But one of the best of the batch of new market entrants has already listed and its shares look cheap compared with those of rivals, despite its superior growth prospects and potential for earnings upgrades.
- Relatively cheap rating
- Niche products
- Cash-rich
- Self-help growth potential
- Demographic trends driving growth
- Only one year of comparable trading history
- Slimmer margins than peers
Bonmarché (BON) floated on the Alternative Investment Market (Aim) in November and despite being in one of the most sought after parts of the market - clothing - its shares' rating of 15 times forward earnings remains low compared with the peer group. What's more, a niche product offering targeting the growing over-50s value womenswear market represents a long-term structural growth opportunity based on demographic changes. And the company also boasts the potential to grow through self-help initiatives and store and online sales expansion.
Two years ago, Bonmarché was bought by private equity group Sun European Partners when its parent company, Peacocks, went bust. Since then, the 130 worst performing stores have been closed and renegotiating shop leases has cut the average rental for the remaining 265 shops by 28 per cent. Capital spending will step up this year with the majority used for much needed store refurbishments - a new format trialled last year in Coventry lifted sales there by more than 9 per cent. Management also plans to improve the product range, lower prices and open roughly five new stores a year.
Crucially, money is also being pumped into the internet. Online revenue accounts for just 5 per cent of total sales - far less than the retail average - so there's huge untapped potential. In fact, sales are already improving. Traffic to the revamped website rose 82 per cent in the first eight months of 2013, translating into a 120 per cent rise in sales.
| BONMARCHÉ (BON) | ||||
|---|---|---|---|---|
| ORD PRICE: | 289p | MARKET VALUE: | £145m | |
| TOUCH: | 286-292p | 12-MONTH HIGH: | 293p | LOW: 214p |
| 2015 FWD Div Yield: | 2.4% | 2015 FWD PE Ratio: | 15 | |
| NET ASSET VALUE: | 22p* | NET CASH: | £2.4m | |
| Year to 31 Mar*** | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 147 | 6.1 | 9.8 | 0.0 |
| 2014** | 160 | 10.7 | 16.6 | 2.0 |
| 2015** | 171 | 11.8 | 18.6 | 6.8 |
| 2016** | 182 | 13.1 | 20.9 | 7.8 |
| % change | +6 | +11 | +12 | +15 |
Normal market size: 1,250 Matched bargain trading Beta: 0.25 *Includes intangible assets of £2.6m or 5p a share **Investec forecasts | ||||
Bonmarché's market is also so niche that there are no direct competitors, which means there's less pricing pressure. It benefits from a loyal customer base, too, with 1.8 million active members in the clubcard scheme, and demographic trends are favourable: the proportion of women over the age of 45 is forecast to rise significantly in the coming years.
Weak margins are a disadvantage, but restructuring should address the problem. House broker, and the only analyst currently covering the stock, Investec expects the operating margin to improve to 7 per cent by the 2015 financial year-end, from 4.9 per cent in 2013. Following a surge in profits this year, the broker believes 11 per cent growth in underlying operating profits looks sustainable. Based on these forecasts, the group's net cash pile should also continue rising with £10.6m pencilled in for 2016.
The group currently only has one year of comparable trading history, which adds an element of risk to forecasts. However, a third-quarter trading update has offered a taste of 'normal' trading: like-for-like sales grew a healthy 4.7 per cent and online sales were up 60 per cent. And as more analysts start covering the stock - a number of brokers are currently looking at the company - confidence in the growth story should increase.
