Market Cap to Net Assets is running at £792M / £186M = 4.25
Multiply this by a P/E of 23.5 and you have a figure of 100.06
What's the significance of this number?
Ben Graham (Warren Buffet's teacher) basically worked on the basis of a relatively safe investment to have a ratio of 23 (Poundland is 300% outside this range). In addition to this £183M of these assets are intangible implying that the net asset value is effectively zero.
On another measure, Poundland is not exactly a new business - it's been around a long time and these numbers are not exactly exciting :-
First take revenue of 4 years -- 2011 - £518M, 2012 - £780M, 2013 - £880M, 2014 - £997.8M
Respectable growth rate with a % growth annualised of 23%.
Yet despite this growth, the operating profitability respectively runs at £15.7M, £28.18M, £30.05M, £27.7M --- This illustrates that despite the high revenue growth, the profits have flatlined over the last three years. It will be interesting to see what happens in 2015.
This could grow, but the valuation is massive and in a market shake out this could fall a lot.
Games - Shop at Poundland, but remain bemused at the valuation of Poundland.
"Sell shares of Poundland, Danny Fortson advised in his Inside the City column. The Sunday Times writer pointed out that Warburg Pincus, the US buyout house, can start to unload its remaining 37% stake from 8 September. Poundland's business is sound. It generates lots of cash, has little debt and sells cheap goods that capture the mood of the times. Warburg probably won't dump its shares because it does not want to annoy investors that might want to buy its other companies but it will not be around for long. Wait till it has sold before buying Poundland."
Results were messed up by one off charges this year. But price to sales ratio is quite attractive at 0.6 or so. Hopefully they can achieve reasonable margins this year, and
the low inflation environment is supportive. They even have some quite good stuff to
sell, I went in my local one just after it had opened one morning and had a good look around. When I go in at lunch time it is usually so packed that you can't see everything on offer because of all the bodies in the aisles ! Fixed price - variable quantity retailing is more
robust to a medium inflation environment too, just reduce the pack sizes until you need to
rebrand as twopoudland, and start again. If we get high inflation then they're screwed.
Two key reasons to sell Poundland, coupled with my view on the immediate valuation :-
1. Poundland can not handle inflation with a fixed sell price of £1
2. It's unable to absorb further rises in VAT which are possible with an indebted government
In terms of it's valuation:-
3.The P/E is very high at 26.6 out to March 2015 so any slip ups or disappointments in the analysts forecasted or expected results and this will fall heavily.
4.While you are carrying that risk as an investor, you are not being rewarded for it. The yield is at 1.2% is below inflation so you are losing money in the process compared to much higher more guaranteed yields with more stable and secure companies.
5. It's not that new a concept and has a lot of competition, even if you exclude the supermarkets. Poundworld, 99p Stores etc
On the positive side it's debt has been whittled down using the proceeds of the flotation, but will that start to grow again with expansion?
"Despite the 15 per cent fall in the shares since their stock market debut and the limited information out from the company since then analysts at Credit Suisse upgraded their view on Poundland to 'outperform' from 'neutral' on Friday.
To back that decision up they called attention to the quality discounter's price competitiveness and niche position, as well as its valuation relative to the sector.
In branded food/health&personal care (Food/HPC) there is a 30% price gap between the value discounters and supermarkets, the broker pointed out. That differential climbs to 50% in convenience, they added.
"[ ] we don't see how they can meaningfully close the gap."
As well, Poundland's Food/HPC sales of circa £300m per year, with an average basket of £3, are irrelevant when compared to the likes of Aldi/Lidl/Iceland's sales figures, they argued. In the case of Tesco the relevant magnitude was £40bn.
The Swiss broker further estimated that sales and profits would expand at average rates of 15% and 21%, respectively, over the coming five years, with a cash conversion ratio of 100%. That put them on a forward price-to-earnings ratio of 23.
A comparison with its peer group yielded a forward price target for the stock of 400p.
Nevertheless, the company needs to deliver on "stores, rising margins and the Spanish trial, but we believe this risk is largely discounted," these analysts further pointed said."
On Tuesday, Poundland finished at its lowest level since the IPO, closing 12 lower at 353p, after analysts at both Credit Suisse and JPMorgan Cazenove, joint bookrunners on the float, suggested that the discounters current valuation is full.
Starting their coverage of the group with a neutral recommendation and a 400p price target, the experts at Credit Suisse said that following the share price jump, valuations are demanding.
They added: To justify this valuation over the next year Poundland does need to deliver continued high levels of store growth, rising EBIT margins and a successful Spanish trial.
Haven't bought any yet. I will hold off for a while to see what happens. I like the 400p target though
Maybe the reason for the dip in the price is the comment below about underlying profits being in line with market consensus. The market likes things to be above market consensus which is a good trick if you can pull it off.
"Year End Update (8th May)
Poundland Group plc ("Poundland", or "the Group"), the leading UK single price value retailer, today announces its year end trading update for the 52 weeks ended 30 March 2014. The Board will announce audited full year results for the period on 3 July 2014.
Total sales of £997.8 million increased by 13.3% year on year (2013: £880.5 million). The Group delivered a good underlying profit performance with margin well managed and costs tightly controlled across the business. It is therefore expected that underlying profits will be in line with market consensus1.
Poundland's store opening programme continues to progress well, with 70 net new stores opened during the period, bringing the total estate to 528 stores at the year end. As previously announced, the Group has identified further opportunities for growth, both in the UK and internationally, with plans to open 60 net new stores a year in the UK and Ireland and to move towards 10 trial stores in Spain over the next two years.
Commenting on today's announcement Jim McCarthy, Chief Executive Officer, said:
"Poundland delivers amazing value to our customers every day and millions of them, across the UK and Ireland, are voting with their purses and wallets every week. As a result of this support from our customers, we have achieved another record profit performance across the Group, with our store opening programme on track, underlying profits in line with market consensus and good cash generation. Looking ahead, we will continue to manage the business tightly while investing in clear opportunities for future growth. We are confident in making further progress in the new financial year."
1 The current range of analysts' estimates for underlying profits after tax for the year ended 30 March 2014 is £26.6m to £27.3m, with a consensus of £27.0m"
The May edition of Momentum Investor has a long, detailed and very positive article on Poundland concluding with a Buy recomendation in these words :-
"Poundland is fresh to market so we haven't yet seen any forecasts. That said, we believe its excellent track record, leading position in fast growing markets, high returns on investment, low debt and aggressive store expansion are all reasons why the shares could prove one of the best performers of the decade."
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