Although the outcome of the summer-long competition authorities’ inquiry of its purchase of 99p Stores was as favourable as it could have been, the market did not like Poundland’s update on trading.
The deal to buy the family-owned 99p for £55 million was announced in February. Because of the way these things work, Poundland was prohibited from gaining any new information about 99p, including how the summer trading went, until the Competition & Markets Authority had concluded its investigation last week.
Once the books were available again, Poundland found that its target’s financial position had “weakened somewhat”. Some suppliers had become cautious about providing more product, which meant that the range in the stores during the summer was limited.
Poundland insists that this does not affect the rationale behind the deal, because the intention is to convert all the 99p estate into its own format over the next year or more. This will provide an estimated £20 million of synergies.
The deal was plainly too good to pass up, there being an understandable limit to the number of chains selling everything at a quid that come on the market. Poundland has hired consultants and reckons that, with its own estate, those 99p stores and the potential for new build, it can reach a total of 1,400 outlets in due course.
The two-year trial in Spain is as yet unproven and probably isn’t making any money. The company, though, admitted that its own trading over the summer had gone into reverse, a fall of 2.9 per cent in like-for-like sales.
There were good enough reasons for this. The corresponding period had growth of 4.7 per cent, the strongest in its history. The weather was better. The now largely forgotten craze for loom bands added a couple of million to the bottom line then.
The high rate of store openings in the first half means that this year will be more heavily weighted towards the second. Poundland will hit market targets, but the update, and a placing at 280p to fund the 99p Stores, sent the shares off 41½p to 268p, well below their £3 float price in spring last year. They sell on 19 times earnings but, given the growth built in, look like good value again.
Cost of 99p Stores chain £55m
MY ADVICE Buy long term
WHY Multiple is high, but shares have come back to below the float price and the 99p deal ensures strong future growth
Fosun, the Chinese conglomerate, probably has rather more on its mind at present than the European travel industry, but the reckoning is that one day it will buy the rest of Thomas Cook.
The company took a 5 per cent stake at almost 126p in the summer and agreed to buy the same again in the market. For some reason it has not yet done so, but hopes of an eventual bid have sent Thomas Cook’s shares higher in recent weeks, after they fell to a pound in August.
They were up 3p to 119p on a so-so trading update. This summer’s season is almost fully booked, as expected, and it is too soon to say much about the winter season. Thomas Cook has warned in the past about weaker trading on the Continent, and while bookings are running at the same level as last year, prices are under pressure.
On a more positive note, bad weather in Scandinavia, another area of weakness, has encouraged holiday makers to head for the warmth. The company has held its nerve and not resorted to heavy discounting, it seems. We heard a similarly upbeat trading update from TUI Travel on Wednesday.
Thomas Cook will give a further update on the transformation of the business put in train by Harriet Green, the former chief executive, with the results in November, while the joint venture with the Chinese will take a while to contribute. The shares sell on ten times next year’s earnings. Unless you think the Chinese will bid immediately, and I doubt it, there seems no compelling reason to get on board.
Summer season already sold 91%
MY ADVICE Avoid
WHY No guarantee of an imminent Chinese bid
There were no shocks in the WS Atkins trading statement, but nor should there have been, because the bad news is in the market already. Atkins is coming to the end of a programme to shift margins up to 8 per cent, by selling underperforming businesses and focusing on more profitable work.
To take the negatives, there is understandable caution on the part of property developers in the Middle East to start work on grandiose new projects, given the low oil price. China has slowed down, so much the same goes for large developments in the regions there.
In North America, margins are being held back by the cost of bidding for larger contracts, mainly in rail, where the company has considerable expertise, though this will eventually feed through into useful work. The company will end the financial year to March 31 with as much as £200 million in cash, enough to fund any useful acquisitions that come along.
I suggested in June, when the shares were above £15, that investors should take profits. They lost 11p to £13.81 yesterday and sell on a more reasonable multiple of less than 14 times earnings, but there seems no reason to buy now.
Estimated net cash at year end £200m
MY ADVICE Avoid for now
WHY Shares have come back but price still seems full
And finally . . .
Penna Consulting was one of the rare spots of blue in yesterday’s sea of red. This AIM-quoted company is unusual among headhunters in providing outplacement services as well, finding existing staff somewhere to go as well as new employees. It also has a talent management side, the subject of a positive note from Panmure Gordon this month. The company told the annual meeting yesterday that profits so far this year were up by more than a quarter, after a strong performance a year before.
Follow me on Twitter for updates @MartinWaller10
