It’s hard to find a compelling investment case among retailers these days. Either they come fully-valued or without any sort of decent growth prospects. That's why convenience chain McColl's (MCLS) has caught our eye. It offers a low rating, respectable growth forecasts and an attractive yield. Yet, since its initial public offering in February, the company has somewhat struggled to gain investor interest, perhaps overshadowed by the sheer number of retailers vying for the limelight in the IPO craze at the start of the year. But, judging by its maiden interim results - which were bang in line with expectations - this might all begin to change.
- Lowly rated
- Post Office counters roll-out
- Store improvements
- Convenience trend
- Slim margins
- Execution risk
McColl's opened its 750th convenience outlet in June and is on track to run 1,000 by end-2016. It also operates a further 544 newsagents. The plan is to grow the convenience division through acquisitions - with roughly 35,000 independent corner shops across the UK, there are rich pickings - and convert roughly half of the newsagents into convenience store formats. Many existing convenience outlets are also being upgraded into 'premium' layouts, offering a wider range of fresh food. This is important because conversion usually results in a 2.4 per cent sales uplift.
The wider trend towards convenience shopping is a further tailwind. Even for the large supermarkets, the sub-sector remains one of the few categories still growing strongly. McColl's is a convenience specialist, so it's extremely careful about choosing sites with potential for maximum footfall. Coupled with this is a focus on providing value-added services for local residents, giving them reason to enter the shops. That includes Post Office counters and CollectPlus, both of which are benefiting from growth in online shopping. CollectPlus allows shoppers to arrange to have their parcels delivered to local shops for collection. As for the Post Offices, McColl's is adding branches to its network and, under a new agreement, is converting 191 existing Post Office counters to a new "local" model that offers services at the retail counter. That means shoppers can use the service for as long as the store is open. While not hugely profitable, Post Offices bring people into the stores and McColl's gets a cut of every transaction.
| MCCOLL'S RETAIL (MCLS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 183p | MARKET VALUE: | £192m | |
| TOUCH: | 180-186p | 12-MONTH HIGH: | 195p | LOW: 156p |
| FORWARD DIVIDEND YIELD: | 6.0% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 100p* | NET DEBT: | 35% | |
| Year to 25 Nov | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011** | 805 | 10.5 | na | na |
| 2012** | 845 | 13.3 | na | na |
| 2013** | 869 | 4.4 | 7.0 | na |
| 2014*** | 900 | 22.5 | 16.8 | 10.1 |
| 2015*** | 936 | 24.0 | 18.1 | 10.9 |
| % change | +4 | +7 | +8 | +8 |
Normal market size: 1,500 Matched bargain trading: Yes Beta: -0.06 **2011 and 2012 pre IPO figures and 2013 pro forma figures *Includes intangible assets of £136m, or 130p a share ***Numis Securities adjusted forecasts and based on pro forma financing charge | ||||
Of course, the big caveat is the execution risk with this strategy. We're not out of the economic doldrums yet, and consumer spending remains weak. The food retail sector is in upheaval and completely out of favour in terms of investor sentiment. Even by the standards of food retailers, McColl's margins are slim: the group's 2013 operating margin was a meagre 2.6 per cent. However, like-for-like sales grew 2.1 per cent in the half-year, and operating profit rose 15 per cent to £10m, putting the group on track to meet full-year growth forecasts of 8 per cent. Despite this, the shares are trading at just 11 times expected earnings for the current financial year dropping to 10 times next year's forecasts. It's also set to be a generous dividend payer, based on its policy of distributing 60 per cent of underlying post-tax profit.
