McColl’s Retail Group – £37m group to make £2m, then £5m, then £10m PBT in next three years
26th April 2021
At the end of March this neighbourhood stores group announced its results for the 53 weeks to 29 November 2020.
Despite increased sales at £1.26bn its adjusted pre-tax profits were down 85% at £1.1m.
Does that bother me?
Not one iota!
Because I am looking for this group to show some strong growth over the next two to three years.
And I think the company’s shares are very cheap now, especially after the recently announced agreement with Morrisons.
In addition, the group has recently extended it banking facility to enable it to follow its growth strategy.
Over a century and a score not out
The McColl’s Retail Group (LON:MCLS) can trace its origins back over 120 years.
In 1901 former footballer Robert Smyth McColl and his brother Tom set up the first store in Glasgow. After several acquisitions it has expanded impressively.
When it floated in February 2014 its management set a target of having 1000 stores – which was achieved in 2016.
Today it has an estate of some 1265 stores. It has been more in number, but Covid-19 has seen the group amend its strategy, with stronger growth expected to be shown at its larger stores.
Store optimisation policy underway
In fact, last year it closed down 179 of its stores and it has outlined a store optimisation target of cutting down its portfolio to 1,150 by the end of 2021. This is part of its policy to focus on larger, food-led convenience stores.
During the pandemic it became obvious that the strongest revenue performances were driven by the stores with the highest grocery mix.
But let us look first at the group and the way it operates.
Its aim is to be the neighbourhood’s favourite shop, offering long opening hours (6am – 10pm) for its customers to purchase essential food and groceries, fresh fruit and vegetables, ready meals and freshly prepared food-to-go.
It also offers a lot more, such as Post Office facilities, Amazon lockers and Collect+ points, bill payment services, home news delivery, cash machines and national lottery terminals.
Of that 1265 number, convenience stores tally up at 1093, while it also has 172 newsagents.
In total it boasts 534 Post Offices within its store’s framework, it is the largest such operator in the UK.
Little but often on a local basis
The average basket spend is £7.61.
It reckons that 51% of its customers live within 400 metres of one of its convenience stores, with some 21% visiting the store every day.
It serves up to 5m customers a week.
In the last year or so there has been a fundamental shift in consumer behaviour.
Before Covid-19 customers would buy drinks on the go, they would pop into the stores as they commute, they would grab snacks or food-to-go, and they would make regular supermarket trips.
With Covid-19 the group’s shoppers have been buying drinks to take home, they have been working from home and doing ‘top-up’ shopping or buying evening meals, as well as seeking online delivery.
The importance of neighbourhood stores and convenience retail to local communities has never been greater.
As it remodels its estate to gain better coverage and improve its operating margins, the group is working with several partners to enable its growth – such as Morrisons and Uber Eats.
Looking at the partnership agreements I must first note the very important one with Morrisons Supermarkets.
Since 2017 McColl’s has become an important customer for Morrisons. It handles wholesale supply for over 1,200 McColl’s stores.
This partnership has also extended, initially, to see 31 of McColl’s stores being refitted and rebranded as ‘Morrisons Daily’ stores.
That pilot trial has been so successful that the beginning of March saw an agreement to convert a total of 300 McColl’s convenience stores over to the ‘Morrisons Daily’ format, over the next three years.
The agreement also sees Morrisons act as the sole wholesale supplier to the group until 2027. This really is a quite stunning deal, it simplifies McColl’s operations and makes a great deal of sense.
Out with Deliveroo in with Uber Eats
As for its partnership with Uber Eats – it should have been operating a home delivery service of everyday convenience goods from 400 of its stores by the end of last month.
This time last year it started using Deliveroo for its service, but it has been dropped (a bit like its shares).
Good equity support
There are 115.3m shares in issue, the largest Director holding stock is Chief Executive Simon Miller, with 11.7m shares (10.1%).
Professionals with holdings include Aberforth Partners (13.1%), Klarus Capital (9.89%), Barclays Private Banking (9.89%), Fidelity Investments (5.88%), FIL Investment Advisors (5.79%), Premie Fund Managers (4.95%), Chelverton Asset Management (4.94%), Stonehage Fleming Investment Management (5.11%) and Fidelity Management & Research (5.01%).
New Joint Broker and its bullish estimates
On 14 December last year N+1 Singer was appointed joint corporate broker with Panmure Gordon.
In the middle of this month their analyst Matthew McEachran published his estimates for the 2021-2023 years. He is bullish about the shares and headlines his note on McColl’s as ‘neighbourhood convenience for recovery and growth’.
And looking at his figures I am equally impressed about the group and its potential.
Remembering the stores closure programme - for this year to end November he estimates lower sales at £1.15bn, kicking in adjusted pre-tax profits of £2.2m, worth 1.6p in earnings per share.
For next year he sees a small sales increase to £1.16bn, with profits jumping 236% to £5.2m, generating 3.7p in earnings.
For the year to end November 2023 (not that far away) he sees £1.2bn of sales and £10m profits, pumping in 6.9p in earnings per share.
He computes his ‘fair value estimate’ at 70p per share, but he also sees the possibility of them being even higher still if the current plans and management ambitions start to gel.
Shares on a ‘roller coaster’
The shares were up to 287p in September 2017, prior to the group having supplier problems and suffering from ‘the virus.’ They were down to 154p a year later.
At their Covid-19 worst they fell to just 20p last year, before hitting 54p three months later in June. They eased back to 24p by the end of February this year, days before the Morrisons announcement on 1 March, hitting 37.5p subsequently in reaction.
Well positioned in a market that is destined to grow
So yes, the shares now 32.5p, appear to be riding a ‘roller coaster’ – but I would rather be aboard right now before it takes off again (and it certainly will do on those estimates).
McColl's is well positioned in a market that is destined to grow.
There should be a positive AGM Statement on Thursday 20 May.
I now set an easy Target Price of 41p, it could well be achieved by AGM time.