B&M European Value Retail SA

B&M European Value Retail SA (LON: BME) is a FTSE 100-listed general retailer Company and is a fast-growing variety goods value retailer. The Company’s stores are operating in the UK and France.

On 3 June 2021, the Company will announce the FY21 preliminary results.

Rationale for Valuation – Buy at GBX 561.40

• BME has traded well with strong revenues and margins, and expects the 2021 revenue to be strong.
• The Company has decent fundamental metrics as it has maintained a ROE above 20% in the last two periods.
• In H1 FY21, the profitability margins were higher than the industry median.
• In the last one year, the Company delivered a return of ~86.60% and delivered higher returns compared to the benchmark Index (FTSE 100 Index).
• On a trailing 12 months, Price/Earnings multiple is currently lower than the Diversified Retail industry.
• From a technical standpoint, 200-day SMA (GBX 485.68) supports an upside potential.

Key Risks

• The Group is presently trading near the 52-week high, raising doubts at the upside potential at the current price level.
• The business operations have been impacted due to the covid-19 crisis.
• A slump in the consumer purchasing power due to massive lay-offs and furloughs could weigh on the demand side of the economics.
• The geopolitical changes and recession in the economy could hamper the Company's operations and affect the company's financial performance and operational stability.

Q4 FY21 Trading Update (fourth-quarter performance to date for the financial year ending 27 March 2021, as on 4 March 2021)

• During the period, the revenues and margins have remained strong, mainly in the B&M fascia business in the UK.
• On a pre-IFRS 16 basis, the Company expects adjusted EBITDA for FY21 to be in the range of £590 million to £620 million.
• Strategically, it re-introduced the colleague discount for all NHS (National Health Service) workers throughout January 2021.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings (NTM) (Illustrative)

Conclusion

For FY21, the Board expects the revenue to be strong. The guidance for FY21 Group adjusted EBITDA (on a pre-IFRS16 basis) narrowed to be within the range of £590-£620 million, with the voluntary payment of business rates amounting to around £80 million. Moreover, the Company has traded well with strong revenues and margins. However, the business is more exposed to the economic uncertainties arising from the Covid-19 pandemic. Previously, it has also delivered a strong financial performance in H1 FY21, with good visibility over current work-in-progress and pipeline opportunities. The stock made a 52-week low and high of GBX 290.89 and GBX 612.00, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on B&M European Value Retail SA at the current price of GBX 561.40 (as on 26 April 2021 at 8:00 AM GMT) with a lower double-digit upside potential based on 17.10x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

AO World Plc

AO World PLC (LON: AO) is an electrical retailer, which sells small and major domestic appliances and consumer electronics. The Company’s operations are differentiated in two segments, namely the United Kingdom and Europe.

On 16 June 2021, the Company will announce preliminary results for the 12 months ended 31 March 2021.

Rationale for Valuation – Buy at GBX 288.60

• In the last one year, the Company delivered a return of ~402.10% and delivered higher returns compared to the benchmark Index (FTSE 250 Index).
• The Company delivered a robust performance across all aspects of the business, supported by the good momentum continuing in the fourth quarter.
• On a trailing 12 months, EV/Sales multiple is currently lower than the Software & IT Services industry.
• From a technical standpoint, 14-day RSI (42.44 levels) supports an upside potential.

Key Risks

• The increased cost of recycling and logistics operations can impact the profitability of the business.
• Brexit uncertainties are creating disorder for the supply chain, currency exposure, people, and consumer demand for UK electrical market.
• The Covid-19 pandemic can pose a significant risk to the supply chain.

Full Year Trading Update Ended 31 March 2021 (as on 15 April 2021)

• Group revenues surged by 62% YoY to £1.66 billion during the period, with an increase in AO.com revenue of 88% YoY in Q4 FY21 and AO.de revenue of 77% in the full year.
• During the financial year 2021, the Company added more than 2 million new customers.
• At the year-end, the net cash was £57 million (excluding right of use lease liabilities), with RCF (revolving credit facility) of £80 million. Therefore, the total liquidity headroom stood at £142.6 million at the period end.

One Year Share Price Chart

   (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales (NTM) (Illustrative)

Conclusion

The Company has given a strong performance across all aspects of the business, supported by a significant revenue increase, improved financial resources and strong cash generation. Despite Covid-related costs, the Company expects 2021 adjusted EBITDA to be in the range of £63-£72 million, while it was also in line with market consensus. In FY21, the German business is expected to generate profits. Overall, it expects a double-digit growth business in the year ahead. The Company has increased its customer base. Moreover, the One AO strategy had significantly improved the operating capacity and strengthened the Company's positioning. The full-year trading update has shown outstanding financial and operational progress. The stock made a 52-week low and high of GBX 56.60 and GBX 444.50, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on AO World Plc at the current price of GBX 288.60 (as on 26 April 2021 at 8:00 AM GMT) with a lower double-digit upside potential based on 1.04x EV/NTM Sales (approx.) on FY21E sales (approx.). 

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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