What: Shares in Booker Group (LSE: BOK) have ignited during the past month, the wholesale foods operator having clocked up an eye-watering 23% advance during May. The Wellingborough business punched an all-time peak above 183p per share in the process, and although momentum has stalled in June, another chug higher in recent days suggest the rally may not yet be over…
So what: Booker’s share price really took off towards the tail-end of last month after it announced the £40m acquisition of the Londis and Budgens retail chains in Britain from Musgrave, subject to relevant regulatory approval from the Competition & Markets Authority.
The move provides a significant boost to Booker’s existing High Street operations, a market that the company services through its Family Shopper and Premier brands. Indeed, Londis boasts more around 1,630 outlets and Budgens some 167 stores, turbocharging Booker’s exposure in the red-hot convenience store segment. Critically, the move also includes the supply chains of these businesses.
And with Booker’s new brands operating mainly in the more affluent regions of England — i.e. London and the South-East of England — the acquisition will effectively compliment Booker’s existing retail footprint which is predominantly focussed on the North.
While it is true that Budgens and Londis remain loss-making, reporting a £7.4m operating loss last year despite combined sales of £833m, Booker is confident that these losses will be neutralised during the first year before becoming profitable thereafter.
Now what: On top of this, Booker’s full-year results released on the same day showed like-for-like sales, excluding those at its recovering Makro chain, tick 2.3% higher during the 12 months to March 2015, lifting pre-tax profit 12% higher to £117.7m. This bubbly result prompted the wholesaler to award a special dividend of 3.5p per share, on top of a 14% raise in the full-year payout to 3.66p.
However, investors should be aware that trading conditions are likely to remain difficult as the supermarkets’ ‘price wars’ intensify. Indeed, Booker warned that, although it has made a spritely start to the year, “we anticipate that the challenging consumer and market environment will persist through the coming year.”
Booker has a terrific earnings record in recent times, and the bottom line has risen at a compound annual growth rate of 14.6% during the past five years, even in spite of a fractional dip in fiscal 2013. And the City expects the wholesaler to clock up further growth to the tune of 9% in both 2016 and 2017.
These projections leave the business changing hands on elevated P/E multiples of 24.1 times for this year and 21.9 times for 2017, however, sailing well outside the benchmark of 15 times that represents decent value for money. Given that Booker may be subject to intensifying pressure on the top line as mass discounting rumbles on, many would argue that the current share price does not reflect these risks. As a consequence I believe that shares in the food giant may find themselves running out of steam.
