market folly

We're posting notes from the Sohn London investment conference 2016.  Next up is Nicolas Walewski of Alken Asset Management who pitched a long of B&M Value Retail (LON:BME).


Nicolas Walewski's Sohn London Conference Presentation

Long B&M Value Retail (LON: BME) 

B&M Value Retail is a UK mid-cap, retail discounter that floated at a high valuation in 2014. The stock has de-rated since then. It sells quite a narrow range of 5500 mostly non-food items. Two-thirds of its products sell at less than £3. B&M is growing very fast with sales growth of 44% CAGR over 10 years. It is expected to grow its sales by 15% over the next few years. It has leading industry returns – 20% return on capital employed.

The business model is capital light. The payback period for a new store is just 8 months (a traditional retailer takes 3-5 years). Most of B&M’s stores are in northern England. It has plans to expand into the south-east.

B&M sells products that are usually 30-50% cheaper than its competitors. It can do this because it buys direct from China without any intermediaries. They buy narrow, they buy deep, and they buy cheap. Typically, they buy an entire line of production so they get a good price. B&M does not own prime locations.

The leadership is good. CEO, Simon Aurora, has been with the firm 12 years and has grown the business from 20 stores to over 500. He owns 21% of the shares. The chairman is the experienced ex-Tesco CEO, Sir Terry Leahy.

B&M has established a presence in Germany. It has bought a majority stake in Jawoll with 56 stores. The German management will likely be replaced by Simon Aurora in a year or two.

The share price has been hit by Brexit. It is very cheap. B&M can become the Dollar General (DG) of Europe.

What are the risks? Two issues worry the market. Gross margins and like-for-like sales. The market is worried that Brexit and the devaluation of the Pound will lead to higher import costs. If inflation does pick up, discounters will take market share. You are better off with B&M than a mainstream retailer. B&M pays back the cost of new stores very quickly so it does not need high growth in like-for-like sales, 1 to 2% per year is enough.

Be sure to check out the rest of the Sohn London conference presentations here.