PLND - A 'tantalising' share22 Apr 2016 12:58
PLND - A tantalising share......
http://www.iii.co.uk/articles/311549/stockwatch%3A-tantalising-share?context=LSE:PLND
Is a near "double-bottom" in £430 million discount retailer Poundland (PLND) worth backing? Being an actively traded FTSE SmallCap may contribute to volatility, but the chart since flotation in March 2014 shows a semblance of having formed one.
After plunging briefly below 140p in response to quite disappointing news on 14 April, the stock rallied firmly to about 175p, a level that could be seen as short-term resistance. Chart-focused traders will be interested to watch if another move up affirms a double-bottom, but meanwhile - what of the fundamentals?
Another sour lesson in private equity flotations
The stock's debacle from a 300p flotation price in March 2014 and a 420p peak a year ago affirms scepticism of "revolving door capitalists". Poundland started in 1990, its founder selling his stake for some £50 million and US financier Warburg Pincus buying the business for £200 million in 2010, then raising £142 million by selling half its stake to 16.4% in early 2015 when Poundland acquired 99p Stores. As with Debenhams (DEB), the cynical view is that this reflected quite a culture of wheeler-dealing to enhance progress and exact gains, leaving long-term shareholders with the risks.
The financial summary table shows good revenue growth and, broadly, an expansion of profits, but such a general high street retailer has become challenged to sustain the kind of growth expected by the stockmarket. Online sales were only introduced last autumn with delivery costing £4 unless you spend over £50 on £1 items - not exactly a compelling retail formula.
The February 2015 acquisition of 99p Stores Ltd for £55 million is now characterised as "mainly a property deal" to grow the Poundland estate. After the trading losses from 99p Stores proved worse than expected, management has had to achieve a 15-months' refurbishment in four months.
The latest update comes across well, excepting "a tough quarter for the core business" and like-for-like sales down 4.9% over six months to end-March. Analysts downgraded in response and there is also concern (e.g. from HSBC) over how the actions and investment needed to stabilise 99p Stores have compromised cash flow - such that the group now has net debt.
Aspects of this should improve with changes in working capital, but it poses questions for the extent of prudent dividend growth in the short term, up from 1.5p per share, on which a prospective yield of 3% is based.
The table shows very strong cash flow (from which dividends are paid), albeit historic figures. The 2017 price/earnings (PE) multiple may only be about 12 times, but that assumes record profitability; for the financial year just passed, the PE could be over 20 times. Without any margin of safety in key valuation metrics, the stock is, therefor
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