Back in May, I suggested that discount retailer B&M European Retail SA (LSE: BME) would benefit from the tightening of purse strings in response to the coronavirus pandemic. Since then, the shares have climbed almost 30% in value, catapulting the Luxembourg-based business into the FTSE 100.
Based on today’s interim results and the fragile economic backdrop, I wouldn’t bet against this momentum continuing.
B&M profits soar
Group revenues jumped by a little over 25% to £2.24bn over the six months to the 26 September, thanks in part to the company’s out of town locations proving popular with bargain hunters. Like-for-like revenues at UK stores rose 23%.
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This trend continued at B&M’s other businesses with frozen food-focused Heron Foods continuing to trade well over the period. The firm’s Babou stores in France also registered “positive like-for-like sales growth.“
All told, adjusted pre-tax profit soared 128.5% to £253.6m over the period. That’s a stunning outcome considering the hurdles faced in 2020. It’s even more impressive considering the sector in which B&M operates.
The question is, will these numbers keep rising?
Promising outlook
Despite this week’s solid gains in the FTSE 100 and news that the UK has bounced back from recession, I don’t think we’re out of the woods yet.
For one, it’s clear that getting everyone vaccinated against the coronavirus will take time. This lag is easily forgotten by markets desperate for something positive to focus on. In the meantime, the coronavirus death rate in the UK continues to rise.
The economic wounds wrought by the coronavirus will also take a while to heal. As many businesses struggle to make ends meet, there’s every chance unemployment levels will continue to rise. After all, many firms will see the pandemic as an opportunity to become more efficient, even if they don’t necessarily need to cut jobs. This tends to be a good thing for investors. Less so if you’re an employee.
The vulnerable state of peoples’ incomes could prove a tailwind for B&M and its capacity to keep growing. Indeed, the company plans to have unveiled a total of 40-45 new stores in FY21 (although it will also close 10 sites). Naturally, this bullishness bodes well for those holding the shares, even if like-for-like sales growth is expected to “moderate” over the second half.
Good value
Based on the above, I suspect B&M will continue to trade well for a while. Naturally, the quandary for investors is estimating how much of this is already reflected in the share price.
On this front, I’m inclined to say, ‘probably not enough’. After all, the shares traded on just 15 times forecast earnings before markets opened this morning. That still looks pretty reasonable to me. The muted reaction to today’s results points to profit-taking rather than anything to be concerned about.
There’s also a dividend stream to consider. Today, B&M revealed that it would increase its half-year dividend by a stonking 59.2% to 4.3p per share. In addition to this, the FTSE 100 member also promised to pay out a special dividend of 25p per share. With many companies still cautious on their cash payouts, this is likely to attract more income seekers to B&M, further supporting its share price.
The £5bn-cap has been a great share to hold over 2020. I wouldn’t be inclined to leave the party just yet.
