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Poundland Group Plc Q4 Update – 21 May 2015

Company Overview:

Poundland Group PLC operates as a single price, value general merchandise retailer in the UK and Europe. The group currently trades from a network of 517 high street and out of town stores in the UK (31 December 2013) and has plans to increase the total number to over 1,000, in addition to international expansion. The group also own 31 stores in the Republic of Ireland where it trades under the Dealz brand.

Until its IPO in Q1 2014, Poundland Plc was majority owned by Warburg Pincus Private Equity (76%), while management held the remainder of the shares following an earlier MBO (Management Buyout). Although Warburg Pincus has, since IPO, reduced its stake in the firm, members of management have retained their stakes.  The Chief Executive, Jim McCarthy, remains the fourth largest shareholder with a 3.87% ownership claim.

Poundland Plc stands apart from the crowd in the UK value merchandise arena given that it is the only such retailer to have professional ownership and management, which is in contrast to the family owned/managed structure of most competitor businesses.

Index FTSE 250 Ticker PLND.L Latest Close 321.40
52 Week High 421.00 52 Week Low 295.00 P/E (F) 23.9
Dividend Yield % N/A Dividend Cover N/A CEO: Jim McCarthy
CFO: Nick Hateley Previous Price Target 360.00 Current Price Target 360.00

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Poundland hits price target in January, although shares remain volatile so far in 2015

Poundland share embarked upon a strong recovery in the first quarter of the new calendar year, hitting our price target of 360.00 pence late in January, as the group unveiled a better than expected set of results for the third quarter.

This strong results update was followed swiftly by an announcement that the group was pursuing an acquisition of its biggest rival in the UK (99p Stores).

However, the shares fell sharply in the second quarter as concerns over whether or not the group’s proposed acquisition of 99p Stores would secure the approval of competition authorities.

As a result, the shares closed in London at 321.40 pence on Thursday, which is more or less the same level at which they started the year.

Today we review the group’s recent results and trading performance for Q4 before assessing the potential for a takeover of 99p Stores to add value for shareholders going forward.

Poundland Group Plc Share Price / Daily intervals

Poundland Plc In May

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Poundland reports another strong set of quarterly results, although organic growth begins to slow

April 2015 saw Poundland report Q4 results in which it highlighted another strong period of growth, with total sales growing by 11.8% (12.7% 2014) and like for like sales increasing by 2.4% (1.7% 2014) for the 2014 – 2015 year.

The group opened a total of 60 new stores during the period, a slightly lower number than the 70 new store openings reported during the previous year, while it also confirmed that its exploration into the Spanish market for discount retailing was on track and that performance was in line with expectations.

Management also reported that the group swung from having a net debt position to a net cash position on its balance sheet during 2014.

While full year financial results are yet to be released, all of the available information continues to suggest that the group has probably met market expectations for earnings per share of 13.4 pence for the period, which implies a forward price to earnings multiple of 23.9 X.

The release date for full year financial numbers is 18 June, at which point we will be able to gain a deeper insight into the group’s overall financial performance during the period and its financial position at the close of the period.
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Implications of a slowdown in UK organic growth for Poundland Plc

At the time of our last update we wrote about how management had described the contribution to like for like growth coming from new store openings as diminishing, which suggests to us that the low hanging fruits in terms of new store destinations has now been picked and that the organic growth rate in the UK could now be lower from here onwards.

The most recent trading update from Poundland continues to point toward a diminishing growth scenario, with total sales increasing by an annualised rate of 11.8% in the fourth quarter, which is slightly lower than the 12.7% growth rate experienced in the previous year.

This trend in growth will most likely serve to increase the focus of investors upon Poundland’s venture outside of the United Kingdom into Ireland and Spain, as amidst an environment of cooling growth in the UK geographic diversification will be the only way that Poundland can continue to expand organically.

However, this is not necessarily the end of the line for UK earnings growth at Poundland as if the group is able to secure regulatory approval for its acquisition of 99p Stores, then the group could continue to see double earnings growth for some time to come.
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Initial thoughts on acquisition of 99p Stores  

The initial announcement of Poundland’s intention to pursue an acquisition of 99p Stores was warmly received by the market, forming the primary driver behind the 30% rally in the shares during the first quarter.

However, the Competition and Markets Authority has since announced its intention to classify the single price retail space as a separate environment to that of the overall retail industry in the UK and as such, concerns have built rapidly over whether or not Poundland will be able to go ahead with the deal.

The road toward approval will probably take some time however, management have announced that they will continue to pursue a full takeover and in doing so, have elected not to offer any remedies or to make any concessions to the regulator ahead of a complete Phase II competition review.

At present it appears that much of the group’s prospects for success will depend upon whether or not it can convince the CMA that a merger would not harm competition within the areas that the combined company operates, or that single price retailing should be classified as part of the overall retail industry instead of a standalone market.

If Poundland fails to secure the necessary approval then it could face having to dispose of a portion of its stores, or abandon the acquisition altogether.

While it appears to early to call whether or not the group will be able to sway the regulator, the decision of management not to offer any remedies or concessions indicates to us a degree of confidence that they will be able to secure a deal.

This is while if the merger does go ahead, then the combination could see Poundland’s earnings boosted by as much as 25% in the first 24 months alone, which would be very positive for the group as it addresses the slower growth problem in the UK while it could also help to provide a stronger capital base for its overseas expansion.

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The takeaway

In short, Poundland is likely to continue to grow at an attractive rate in the coming quarters even without the anticipated boost that acquisition activity could provide. However, this growth rate now appears to be on verge of a downward trajectory and over the medium to longer term, this could be enough to unnerve investors and to depress the shares.

We are optimistic that management’s plans to expand geographically and inorganically will be able to offset the impact investor sentiment of slower growth in the UK, although the European expansion is still in its infancy and significant uncertainties exist in relation to whether or not the group will be able to proceed with the planned takeover of Poundland Plc.   

These factors could weigh on the share over the near to medium term and for this reason we are reluctant to consider revising our price target at this early stage. However, we will watch for developments in the CMA enquiry during the months ahead and shall update our outlook for Poundland Plc when the group unveils full year financial results in June (18th).

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