Interim results from Bonmarche is looking increasing encouraging, as sales grew by 5% and LFL increased by 4.3%. Is Bonmarche share price looks increasing undervalued?
Before answering that question, let’s briefly look at Bonmarche.
Bonmarche: the mature fashion retailer
Bonmarche is an over-50 fashion retailer, who used to belong to The Peacock Group.
But, The Peacock Group went into administration and Bonmarche got sold to a private-equity firm called Sun Partners for £10m in 2012. The turnaround plan is simple as it involves downsizing. Sun Partners closed 160 stores which resulted in the loss of 1,400 jobs.
When it floated in the market in 2014, it was over £2 per share, or over £130m market capitalisation. Sun Partners saw their original investment rose by 13 times in two years. So, they decided to sell 40% of their stake raking in £52m.
It resulted in a £42m profit, while it still holds 60% of Bonmarche.
Share Price: £1.02 (up 13%)
Market Capitalisation: £49m.
Bonmarche continues to recover from difficult trading conditions.
The biggest improvement came from improving profit before tax of £4.2m from £2m. I feel profits are returning to 2015/16 level (pre-tax profit in 2015: £12.4m; 2016: £9.6m).
Another positive development is cash and cash equivalent increasing to £16.1m from £10.36m. The interim cash balance is always greater than their full-year results. I expect cash to be greater than last year £6.95m.
Bonmarche saw a doubling in operating cash flow to £15.4m, thanks to positive interim working capital movements (cash inflows of £8.74m, compared to last year £4.3m). If you apply last year working capital movement to this year operating cash flow, then operating cash flow would come in at £11m, it is still higher than £8.16m reported last year.
Caution is in the air due to uncertainty surrounding the level of discounting that retailers will apply from Black Friday and onwards. But, for the FY 2018, PBT is anticipated to be in line with the Board’s expectations.
Now, let’s look back at Bonmarche financial performance.
Bonmarche’s financial performance
Chart one: EPS, Dividend per share and Average Share Price
Basically, Bonmarche’s shares came under pressure as EPS fell from 20 pence to below 10 pence, while it maintains dividend per share.
If we associate rising EPS to a rising share price, then we should expect a recovery because Basic interim EPS is 6.8 pence, higher than last year 3.1 pence.
Also, Bonmarche profits are second-half weighted. Last year, full-year Basic EPS was 9.2 pence, as the second-half contributes 6.1 pence or 64% of total EPS.
Using the same percentage of contribution and apply it to 2017/18 period, we could see Bonmarche reporting Basic EPS of 20 pence in 2018. However, I would caution this hypothesis and highlight management uncertainty on the level of discounting. Because this could affect profit margins and EPS.
Therefore, a reasonable EPS for FY 2018 could conservatively range from 14 pence to 17 pence (I expect 16 pence) is a prudent assumption.
Bonmarche Dividend coverage
Historically, Bonmarche has seen cash dividend coverage (net cash flow profit/dividends) trend lower from 5 times coverage to 2.3 times coverage. Meanwhile, the payout rose from £2.2m to £3.4m.
Since 2014, the market capitalisation fell from £145m to £44.5m causing the dividend yield to rise from 0.2% to 7.6%.
Although I expect dividends payout to remain unchanged, Bonmarche should see an improvement in cash dividend coverage as net cash profit grows.
Bonmarche Trade Receivable Advantage
The one advantage Bonmarche has is their low level of trade receivables. Although, last year receivables are around £15m. Only £1.8m is considered trade receivables because prepayments make up for £13.3m. In their 2017’s Annual Report it states that: “Prepayments at 1 April 2017 include £9.4m of business rates charges relating to FY18 (26 March 2016 in respect of FY17: £9.1m).”
Trade receivables of £1.8m make up for less than 1% of group sales. That is pretty low by fashion retailer standards!
Also, I’m not surprised because the older generation tends to be cash conservative (more frugal than their younger counterparts). They also have more wealth because of the number of years they work. Add in the cheapness of Bonmarche (their most expensive items sell for less than £50), then you see less reason for customers to pay in credit!
Future Benefit: Bonmarche falling lease
Bonmarche still operates as a bricks and mortar business but is slowly becoming an omnichannel company.
From 2013 to 2017, annual rental costs fell from £15.6m to £12.1m. But, notice that total operating lease fell from £75.7m to £43.6m. Hopefully, it will feed into lower annual operating lease in the future.
Looking at their store numbers, it rose from 263 in 2014 to 271 stores by 2017, although their concessions are becoming a growing part of their business with 56.
Either Bonmarche is getting better at negotiating leasing terms or they are shortening their lease terms and renegotiating it every three to four years.
It looks like Bonmarche is getting better leasing terms because operating lease between 2 to 5 years has fallen from £45.5m to £27.14m in four years.
A total of 2 brokers are covering Bonmarche.
First, the consensus is for the share price to rise by 34% to £1.20 in the next 12 months. They expect EPS to rise to 12.7 pence in 2018 and 15.4 pence by 2019.
Maybe they need to upgrade EPS for this year.
Putting It All Together – Bonmarche share price could double
With a market capitalisation of £49m and a share price £1.02, this represents a forward-PER of 6.3 times, based on my forecast of 16 pence per share EPS. Even if you take brokers forecast it would show:
FY 18: 8 times earnings;
FY 19: 6.62 times earnings.
As a recovering over-50s retailer with a growing EPS, Bonmarche share price is likely to get re-rated, expect double-digit PER. Therefore, I’m forecasting for Bonmarche share price to rise to £2 per share within the next 18 months.
If you are looking for a recovery fashion retailer with sufficient working capital and no debt, then Bonmarche could a stock to own.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.
As always please do your research.