McColl’s Retail Group — Supply chain partnership and acquisition

McColl’s Retail Group — Supply chain partnership and acquisition

In a significant move, the neighbourhood retailer has partnered with Morrisons for the long-term supply of fresh food and groceries. Financial performance in H117 was robust despite challenging economic conditions. The acquisition of 298 stores from the Co-op creates a platform for further development. We believe that McColl’s has identified a clear strategy in the UK convenience channel, which is forecast to grow 18% to £47bn by 2022, according to IGD.

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McColl’s Retail Group

Supply chain partnership and acquisition

Consumer

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7 August 2017

Price

256.5p

Market cap

£295m

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Share details

Code

MCLS

Listing

LSE

Shares in issue

115m

Business description

McColl’s Retail Group is a leading neighbourhood retailer with a growing estate of 1,650 managed convenience stores and newsagents. In addition, it is the largest operator of post offices in the UK, with roughly 600 in-store counters/branches.

Bull

Well-positioned in a growing sector.

Successful track record of integrating acquired stores.

Strong brand awareness and reputation.

Bear

Highly competitive market.

Reliance on a small number of key personnel.

Entire operation in the UK, yielding exposure to overall economic conditions in that market.

Analysts

Paul Hickman

+44 (0)20 3681 2501

Neil Shah

+44 (0)20 3077 5715

In a significant move, the neighbourhood retailer has partnered with Morrisons for the long-term supply of fresh food and groceries. Financial performance in H117 was robust despite challenging economic conditions. The acquisition of 298 stores from the Co-op creates a platform for further development. We believe that McColl’s has identified a clear strategy in the UK convenience channel, which is forecast to grow 18% to £47bn by 2022, according to IGD.

Supply chain partnership with Morrisons

The long-term partnership provides McColl's with a best-in-class fresh food and grocery offer through the relaunched Safeway brand, and is exclusive for 12 months. It significantly improves the company’s fresh food presence and enhances the range. It improves commercial terms and simplifies the supply operation.

H117: Increasing neighbourhood presence

H117 results signal that McColl’s is on track to deliver its seventh year of sales growth, with revenue up 7.6% y-o-y and like-for-like sales up 0.2%. The acquisition of 298 stores from the Co-op affects FY17 profits, but their successful integration builds business momentum. Performance is supported through investment and estate growth (of 80% in convenience stores since the 2014 IPO), with a focus on customer service, and growing neighbourhood presence and the convenience offer.

Avenues for further development

McColl’s is well positioned as the wider convenience sector evolves and grows. Its focus is to increase market share through acquisitions and internal investment. Strengthening the range of products and services and delivering quality service offer opportunities for organic growth. Also, through a wholesale retender, McColl’s is leveraging its enhanced scale to develop its customer offer.

Valuation: Earnings growth and favourable yield

The recent acquisition supports consensus forecast of 16% revenue and 24% PBT CAGRs in FY16-18e. Management’s focus is to balance capital investment, deleveraging and dividends. Net debt following the acquisition peaks at £139.6m in H217 according to consensus forecasts, but is then set to decline through to FY19. Consensus forecast free cash flows of £15.9m and £27.1m in FY17 and FY18 suggest further acquisition headroom. Despite re-rating on the Morrison announcement, the P/E remains at a discount to its main quoted peer.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

11/15

932.2

21.7

15.9

10.2

16.1

4.0

11/16

950.4

20.8

16.0

10.2

16.0

4.0

11/17e

1119.0

25.0

17.3

10.3

14.8

4.0

11/18e

1254.0

32.2

22.4

10.9

11.5

4.2

Source: Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney, NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney, NSW 2000

Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney, NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney, NSW 2000

Australia

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