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Buy Booker for long-term growth

Wholesaler Booker is a quality business caught up in a sector-wide derating to which it is mostly immune. That creates a buying opportunity
July 31, 2014

Supermarkets have their fair share of woes as shoppers vote with their feet and flock to the discounters. Quarter after quarter of declining sales mean that share prices in the likes of Tesco (TSCO), Wm Morrison (MRW) and even Sainsbury (SBRY) have plummeted. But their misfortune creates an opportunity. Caught up in this sector-wide derating and downgrading is Booker Group (BOK). Unlike the supermarket operators, this wholesaler boasts a strong balance sheet, abundant cash generation, and robust sales growth and it operates a completely different business model. What's more, share price weakness means the stock is not only undervalued, but rated at a two-year low, offering investors a compelling opportunity to buy into a quality company at a cut down price.

IC TIP: Buy at 126p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Effects of Makro acquisition
  • Strong balance sheet
  • Rating at two-year low
  • Enticing growth forecasts
Bear points
  • Supermarket price wars
  • Food price deflation

The supermarkets' 'price wars' have gained a lot of headlines and these retailers are certainly facing an uphill battle, but this trend is not hurting Booker's trading. That's because Booker operates a quite distinct business from the supermarkets operators. As a wholesaler, it has a better balance of products and customers than supermarkets. Its customers range from corner shops and leisure outlets, to pubs and restaurants, to which Booker sells a wide variety of food ingredients, prepared foods and even office supplies. Meanwhile, Booker's delivered service caters to high-end Michelin-star restaurants, smaller family-run establishments, retailers, such as Marks & Spencer (MKS), and even the UK's prison service. The group also has exposure to the fast-growing discount channel through its Premier chain - sales there grew 12 per cent last year. And while supermarkets might be struggling to attract shoppers, other areas of food retail that Booker counts as customers - namely coffee shops, street food and catering - are trading nicely.

Booker's 2012 acquisition of wholesale business Makro is another reason to like the shares. The full benefits of the acquisition have yet to be felt, but early results are promising. True, sales fell in the last financial year by 9 per cent as Makro exited some unprofitable categories, yet that helped profits to hit £11m, compared with an £18m loss the year before, as cost savings and stronger buying power also played a part. Makro should help management achieve its £6bn sales target in the medium term.

Moreover, to thank shareholders for buying the equity that funded the Makro acquisition, cash-rich Booker plans to return £61m of capital to its owners, equating to 3.5p a share. That helped produce a yield of 5.4 per cent in respect of 2013-14. Booker's bosses plan a similar payment next July, but the low dividend yield means the shares are not for income seekers.

BOOKER (BOK)
ORD PRICE:126pMARKET VALUE:£2.2bn
TOUCH:125.8-126p12-MONTH HIGH:173pLOW: 120p
DIVIDEND YIELD:2.9%PE RATIO:19
NET ASSET VALUE:34pNET CASH:£150m

Year to end MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20123.9390.84.832.28
20133.9995.14.512.63
20144.68118.76.063.20†
2015*4.78135.06.303.50
2016*4.88144.66.603.70
% change+2+7+5+6

Normal market size: 10,000

Matched bargain trading

Beta: 1.0

†Excludes proposed special dividend of 3.5p a share *Investec forecasts

Food price deflation is admittedly a threat as it puts pressure on revenues, although even that can produce useful side effects. For example, chip prices have fallen by a few pennies and, for one of Booker's pub customers, this has translated into £20,000 of annual savings That's being invested back into the business, which could mean more trade for Booker. Besides, thanks in part to the Makro acquisition, Booker sells plenty of non-food items that haven't been hit by the same deflationary pressures, such as hard hats, high-visibility jackets and office supplies.

Meanwhile, analysts expect sales growth to pick up over the year as trading at Makro improves. Like-for-like revenue in the first quarter was already 4 per cent higher, and that doesn't include additional sales from Makro. Earnings are set for sector-leading percentage growth in high single digits.

Yet these prospects are not in Booker's share rating. The shares are trading on a ratio of forecast enterprise value to trading profits of just 14 times, a two-year low. In contrast, Booker's average rating over that period is 17 times, with a high of 21 times.