Join our community of smart investors

Bet on brilliant Booker

We see short-term weakness in Booker's share price as a top-up opportunity
February 11, 2016

Cash-and-carry king Booker (BOK) has a formidable long-term track record of strong cash generation and consistent profit growth. We think that these qualities will continue to shine through despite the recent slowdown in sales momentum, which means a rare spell of share price weakness looks like a buying opportunity to us.

IC TIP: Buy at 163p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Increasing profits
  • Highly cash generative
  • Londis/Budgens acquisition
  • Special dividends
Bear points
  • Third-quarter like-for-like sales fall
  • Pressures on footfall

Price deflation has accelerated across the retail industry over the past six months, and this has hurt the grocers' top lines quite considerably. Booker has not been immune to this and, during the third quarter, like-for-like non-tobacco sales fell 1.3 per cent compared with a 0.5 per cent improvement in the second quarter. For a traditional grocery retailer this would be a real problem as falling like-for-likes are usually associated with a squeeze on margins due to the high level of fixed costs (rents, staff, utilities, etc) associated with running a retail operation. However, Booker is not a traditional grocery retailer. While it does manage several retail brands, including Premier and Family Shopper, these are operated by independent retailers, which it supplies with goods. And Booker's role as a supplier means it is able to pass through price deflation to its customers - independent retailers - while continuing to grow its own profits.

The half-year results provided a case in point. While top-line sales fell 1 per cent, Booker still managed to grow its gross profits (the amount of money it keeps after accounting for the cost of goods sold) by a hearty 5 per cent. And the news got better moving down the profit and loss account. A drop in administration costs meant operating profit rose 10 per cent, reflecting a 30 basis point increase in operating margins to 3.3 per cent, and pre-tax profit was also ahead by a tenth.

True, Booker faces some challenges from specific industry changes, including the tobacco display ban which led to lower footfall in some stores (a trend also seen at convenience group McColls). The weather has also been unhelpful in some areas of the country, particularly in the north of England, which has witnessed extreme flooding, in turn deterring many customers from venturing outside and prevented businesses from operating normally. But we see little reason to lose faith in Booker's model or its ability to protect profits and cash generation in the long term. Indeed, broker Peel Hunt has gone so far as to suggest Booker stop reporting like-for-like sales altogether, as it gives "a false reading" on the business.

Booker also stands to benefit significantly from its £40m acquisition of the lossmaking Londis and Budgens brands from Musgrave Retail Partners last year. While the business is expected to shave £3m from operating profit this year, which compares with a £7.4m loss the year before, the acquisition is expected to boost profit by £5m next year. And Booker has been busy reworking the existing store estate, offloading 15 sites to the Co-op earlier this month. While there were no financial details disclosed - and therefore no indication of the cash injection Booker will receive from the sale - it's believed all the outlets were Budgens owned and operated. It therefore makes strategic sense, as Booker has no interest in morphing into a retailer, but only remaining a supplier.

Hopefully, with the Londis and Budgens integration, Booker can repeat the success it had turning around the £124m acquisition of Makro. After bedding in Makro, Booker paid two 3.5p special dividends totalling £123m in July 2014 and July 2015 (included in the dividends listed in our table). Management has already said another 3.5p payout will be made this July, and strong cash generation and the high level of cash on the balance sheet means there could easily be further returns to come.

BOOKER (BOK)
ORD PRICE:163pMARKET VALUE:£2.9bn
TOUCH:163-163.3p12-MONTH HIGH:191pLOW: 137p
FORWARD DIVIDEND YIELD:4.5%FORWARD PE RATIO:21
NET ASSET VALUE:30p*NET CASH:£118m

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)**
20133.9996.96.92.4
20144.681195.73.2
20154.751396.67.2
2016**5.031537.17.3
2017**5.441707.97.4
% change+8+11+11+1

Normal market size: 15,000

Matched bargain trading

Beta: 0.78

*Includes intangible assets of £439m, or 25p a share

**Peel Hunt forecasts, adjusted PTP and EPS figures, includes 3.5p special dividends in 2015, 2016 and 2017 FY