US Edition Poundland
341.9p+13.2
Questor says HOLD
SHARES in discount retailer Poundland [LON:PLND] jumped more than 4pc yesterday as it reassured investors with a solid maiden set of annual results. The company added that it had enjoyed a strong start to the year, which underpins a punchy valuation.
The bounce in the shares combined with the confident outlook on trading means that Poundland has enjoyed a good start to listed life. Shares in the company are now 13.5pc above the 300p listing price set back in March, bucking the trend of weaker IPOs such as online retailers AO World and Just Eat, while over-50s insurance group Saga is also underwater from its offering price.
The discount retailer has started the new financial year strongly. Sales increased by 18pc during the first three months ended June 29, driven by a new store opening programme. The company said that Jane Asher cake holders were flying off the shelves and the group plans to further grow by opening at least 60 new stores this year, down 15pc, from the 70 it opened last year.
The retailer said it opened nine new stores during the first three months, down from 17 opened in the same period last year. But, Jim McCarthy, chief executive, told Questor he expects a busy second quarter for store openings.
“We are confident of further progress through the year whilst recognising our critical third quarter lies ahead of us,” added Mr McCarthy.
The group’s results for the year ended March 30 were solid. Underlying pre-tax profits increased by 23.5pc to £36.8m, on revenue up 13.3pc to £997.8m. The underlying figures are a better guide to ongoing trading as the reported results include about £10m of IPO costs and about £5m in other costs including renegotiating borrowing arrangements.
Questor is always wary of relying on underlying figures but in this case it seems reasonable. Moving away from the absolute profit figures the trading looks sound. The gross profit margin improved from 36.7pc to 36.9pc throughout the year, which included 70 store openings, hinting that revenue growth is not being pursued at the expense of profit. Cost control is also tight as revenue is growing faster than costs.
The cash flow is also encouraging. Cash generated from operations jumped 78pc to £66.8m, from £37.6m a year earlier. That means the company can self-fund the maintenance of its stores, which currently costs about £15m, and the store opening programme, which costs another £16m.
The strong cash generation is reducing debt levels. The net debt at Poundland almost halved during the year from £9.2m, to £4.7m. Mr McCarthy said that with the creation of surplus cash the company would expect to pay a dividend covered about three times by earnings.
Using the forecast earnings of 13.3p, on pre-tax profits of £44m as a guide, this would equate to full-year dividend of 4.4p, providing a dividend yield of around 1.3pc. Poundland expects the maiden dividend to be announced alongside interim results for the six months ended September and payable in January.
Poundland is currently using the majority of its spare cash to fund expansion. The company ended the year with 528 stores, and maintains its long- term target of 1,000 stores in the UK. At the current opening rate that would take about seven years to reach.
Poundland shares are currently trading on about 25 times forecast earnings per share. That is certainly in line with a rapidly-growing retailer, however, we would caution buying at these prices. The second half is expected to be a much tougher retail environment and the rate of store openings is currently expected to be about 15pc below last year.
Poundland shares offer an opportunity to access the rapidly-growing discount retail and convenience store story, because rivals Aldi and Lidl are privately owned. That said, we would wait six months to see some second-half trading numbers before diving in. Hold.