B&M European Value Retail SA

B&M European Value Retail SA (LON: BME) is a general merchandise discount retailer in the UK and France. The stores owned by the Group sell the FMCG products and non-grocery items that include electrical, DIY products, gardening and leisure goods. Some of the retail brands owned by Company include B&M, Heron Foods and Babou. It is included on the FTSE-100 index.

The Company will release the interim results on 12 November 2020

Rationale for Valuation - Expensive at GBX 497.50

• The Company is currently trading at GBX 497.50 which is near 52-week high, and thus it might have limited upside potential. We might see some consolidation in the share price as investors start booking profit.
• Based on the technical analysis, RSI-90 (57.71) is close to the overbought zone, and we might see some downward movement in the share price.
• The Company operates its stores in different geographies, and thus it has to function under additional regulations. Previously it had to close its 101 stores for six weeks from 15 March under the French government’s restrictions.
• Some of the products sold by the Company are not essential goods, and any potential future lockdown can drive down the sales.

Key Risks

• There has been a significant increase in the costs at the store and distribution level post-pandemic.
• The future consumer demand and behaviour remains highly uncertain, and it is highly dependent on the restrictions and how the health crisis unfolds.
• The Company has planned new store openings in the fourth quarter, and any disruption in the market condition might delay the start. B&M European Value Retail might be required to close the existing stores if the strict restrictions are applied.
• The Company is in the business of retail store operation and imports a large number of goods from China. Any disruption in the supply chain would lead to lower sales and a decline in margins.

H1 FY21 trading update (ended 26 September 2020) as reported on 29 September 2020

On 29 September 2020, the Company reported H1 FY21 trading update. It reported an increase in the average spends per customer per visit in H1 FY21. The revenue grew by around 25.3%, and the adjusted EBITDA is expected to be around £285 million. In H1 FY21, the Company opened nine new stores and closed eight stores.

FY2020 result (ended March 2020) as reported on 1 July 2020

(Source: Company website)

The Company reported the FY20 result on 1 July 2020 for the period ended March 2020. The total revenue stood at £3,813.4 million, which increased by 16.5% year on year. The adjusted EBITDA improved by 7.1% year on year to £342.3 million in FY20.  In the UK, the revenue increased by 12.6% to £3,140.1 million mainly driven by new store openings and like for like growth. The revenue for the consumer food business, Heron Foods was £389.9 million. The revenue of Babou stood at €324.2 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

B&M European Value Retail plans to open around 40 to 45 new B&M stores in the UK due to the increase in the leasing activity. Majority of the store openings are scheduled in the fourth quarter. The Company sells everyday value products and has some of the stores located in the outskirts of the town; thus, it highlights the safe environment provided in the store.

The Company has been posting resilient performance with growth in revenue. The like for like sales of the stores have also improved. However, when we compare the performance with the industry median, it is slightly lower. The gross margin of B&M European Value Retail in FY20 was 33.6% that was below the industry median of 38.9%, and the net margin was 5.1% below the margin of 5.3% of the industry. The leverage of the Company was 2.38x that was above the industry median of 1.95x, which means the Company finances its growth with debt.

Based on the above rationale and valuation as done, we believe at the current market price of GBX 497.50 (as on 22 October 2020, before the market close at 11:38 AM GMT+1), the stock of B&M European Value Retail SA is an “Expensive” bet.

*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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