Convenience chain McColl’s (MCLS) delivered what City analysts dubbed a “solid set” of first-half results this week, and we see this as an opportunity to buy its shares. Once considered a poor cousin among convenience retailers, its decision last year to acquire 298 Co-op stores has prompted a revision. Having proved its mettle as a savvy acquirer, McColl’s possibly stands to benefit from the competition regulator's decision to investigate the proposed tie-up between Tesco (TSCO) and rival convenience stores operator Booker (BOK), particularly if consequential site disposals are on the cards. But even if that opportunity doesn’t come to fruition, McColl's is still happily integrating the Co-op deal - boosting revenues, profit margins and cash profits in the process. True, the shares’ lowly valuation might reflect the balance sheet strain caused by the deal, but we think the group can manage it in the short term. The half-year dividend has also been maintained, helping solidify the shares' high-yield status.
- Co-op acquisition driving growth
- Improved profit margins
- Attractive dividend yield
- Further consolidation potential
- Lingering integration risk
- High level of debt
The group has benefited from several tailwinds, including rising food-price inflation, favourable weather and improved investor sentiment towards food retailers compared with the non-food variety. In the first half of 2016-17, McColl’s managed to move like-for-like sales back into the black thanks to favourable weather and an improved mix of products sold. Underlying sales grew by 0.2 per cent for the six-month period, and by 1.4 per cent in the second-quarter alone. With the help of the Co-op stores, total sales rose by 7.6 per cent, while gross margins grew from 24.5 per cent last year to 25.4 per cent. Despite higher levels of opening costs associated with the Co-op revamp, cash profits also grew, and the half-year dividend was maintained at 3.4p.
Profit margins should show further improvement as the year progresses. The chief factors will be a better store mix – more premium convenience stores, where profit margins are higher; a better category mix – which reflects the shift towards higher-margin, higher-growth products; and the acquired Co-op stores, for which a separate contract was negotiated with supplier Nisa prior to the start of the integration process. About two-thirds of the 298 Co-op stores were trading at the end of the first half, and the balance have now reopened. In our eyes, this reduces integration risk but still leaves plenty of room for growth in sales and profits come the end of the year.
Admittedly, the group’s debt level looks much more stretched at £118m, compared with £42m a year ago. Analysts at broker Liberum forecast leverage will stand at 2.5 times cash profits by the end of 2016-17, but they argue that strong cash flows should help debt to fall quickly thereafter.
| McCOLL'S (MCLS) | ||||
| ORD PRICE: | 215p | MARKET VALUE: | £248m | |
| TOUCH: | 210-215p | 12-MONTH HIGH: | 215p | LOW: 146p |
| FORWARD DIVIDEND YIELD: | 4.9% | FORWARD PE RATIO: | 10 | |
| NET ASSET VALUE: | 116p* | NET DEBT: | 83% | |
| Year to 30 Nov | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2014 | 0.92 | 12.6 | 10.2 | 8.5 |
| 2015 | 0.93 | 21.7 | 15.4 | 10.2 |
| 2016 | 0.95 | 20.8 | 15.7 | 10.2 |
| 2017† | 1.11 | 25.0 | 17.4 | 10.2 |
| 2018† | 1.26 | 30.4 | 21.1 | 10.6 |
| % change | +13 | +22 | +21 | +4 |
| Normal market size: 2,000 | ||||
| Matched bargain trading | ||||
Beta: 0.4 | ||||
| *Includes intangible assets of £215m, or 187p a share; †Liberum forecasts | ||||
