The £600 million takeover of Poundland last summer, little more than two years after the company came to the stock market, has heightened attention on the retail discount sector, even if it is doubtful that many City analysts actually go into the stores that often.
Little good has this done B&M European Value Retail, which itself came to the market in 2014. The shares again managed to push ahead of their 270p flotation price, rising 26¼p to 303¼p on the back of strong Christmas trading that may turn out, given Next’s performance, to be among the best in the sector over the holiday.
Like-for-like sales in the UK were up by 8.4 per cent, but take out some special factors and they were ahead by 7.2 per cent. Some of that recovery came from the non-recurrence of disruption the previous October and November from the opening of two new distribution centres, which meant that some goods did not make it on to the shelves and probably accounted for a percentage point of the gain.
The weather was good. There was strong demand for Christmas decorations and the like. There was an additional day’s trading. There was less “cannibalisation”, in the jargon. The company is growing fast and when a new store opens near an existing one, there is an effect on the latter, though this drops after a year.
B&M has 533 stores in the UK and reckons that the market can accommodate about 850. It is little represented in the southeast. There is a much smaller German operation, bought a bit before the float, and ambitions to open elsewhere. Discount stores tend to show a much faster rate of growth than full-priced ones and this is reflected in the relatively high multiples that the shares command.
B&M reckons that by the time it reports figures for the year to the end of March, it will have increased revenues by 70 cent over the previous three years to £2 billion in the UK. That 7 per cent like-for-like sales growth cannot be expected to continue, though, and the fourth quarter will be depressed by the lack of Easter trading.
The growth will continue from new stores openings, 34 of them in the UK in the year to date. The shares sell on about 20 times’ earnings. That looks high enough for the time being.
My advice Avoid
Why The company, like other discount retailers, is outperforming the rest of the high street in terms of growth, but the shares look well priced
NCC Group
NCC has finally bowed to the inevitable and accepted that it is not going to make a go of its domain services business, which was to have provided a third leg to the cybersecurity provider. The aim was to obtain domain names that corporates could use to create secure sites more resilient to cyber- attacks, but this is a crowded market and one that has taken a long time to get off the ground.
The company bought into it two years ago. It was put under review, with the clear implication that it would close, and the value was written off in the summer. The remaining business has now been sold for just €3.75 million, with any further writedowns likely to be minimal.
This should be a positive for NCC, which provides security services and has a highly cash-generative escrow business allowing computer codes and the like to be maintained.
Unfortunately, October brought a nasty profit warning concerning various contract cancellations, which pushed the shares sharply lower. They had been above 360p; they added 3½p to 188¾p yesterday. This means they sell on 19 times’ earnings for the year to the end of May, a trough one for profits. The company is also taking its time bedding in a big Dutch acquisition, Fox-IT, bought at the end of 2015.
NCC has a good record for paying dividends, unusually for a tech stock, and its core market of cybersecurity can only continue to grow. It’s one for the long term, if you are prepared to assume that there are no further disasters ahead.
My advice Buy
Why Share price fall looks overdone, given prospects
Staffline
It will be several weeks before we know how well Staffline has done in the latest round of bidding to provide services for getting the long-term unemployed back into a job. The company, which gets a fifth of revenues but about half of its profits from this type of government work, has applied for the next stage of the project, the so-called Work and Health Programme. This will gradually replace the old Work Programme and, as its name suggests, focuses more on those on sickness benefit.
The company should be as well placed as any. The year-end trading update could give no guidance on this, although market expectations should be met. The staffing side, which provides the private sector with workers in areas such as logistics and food manufacturing, is perfoming strongly.
The shares have been under pressure because of Brexit concerns, specifically the number of staff that it sources from Europe. Staffline is also going to be hit in any recession, although the markets it serves are resilient. The shares, up 10p at 855p, have come right back from £16 in late 2015. That fall looks overdone, on below eight times’ earnings.
My advice Buy
Why Staffline should do well from forthcoming contracts
And finally . . .
Hilton Food Group, probably best known for providing Tesco with meat in this country, is continuing to expand overseas. This week it said that it was building a new meat processing facility in Queensland to supply Woolworths there; now it has reached agreement with Sonae, a big Portuguese retailer, for a joint venture to supply packaged meat. The deal was mooted in the summer and the partners are sharing the €22 million investment. Hilton now operates in 14 European countries, as well as Australia.
