Monthly Archives: August 2016

Stocks in Focus: McColl’s

This week I am focusing on McColl’s Retail Group, the UK-based convenience store retailer with a strong focus on neighbourhood locations (rather than high streets).

Since the early 2000s, McColl’s has been shifting away from being a traditional newsagent and towards convenience food and wine, a market that has been is growing at around 5% per annum due to demographic and structural lifestyle trends. Part of its strategy to grow faster than the market includes converting its existing newsagents into more profitable convenience stores. On top of this, the business has been expanding via the regular acquisition of new stores from independent operators. Today, McColl’s is the second largest operator by market share within the convenience retail space (behind Tesco).

In order to further accelerate its diversification away from its legacy newsagents, McColl’s recently announced a £117m deal to take over a portfolio of nearly 300 convenience stores from Co-op. The CEOs of both groups view the transaction to be in line with their respective strategies: according to Jonathan Miller of McColl’s, the size and location of the stores are perfect for its operating model; and Co-op’s Steve Murrells comments that the stores being sold are too small to accommodate all the firm’s own-brand products.

Investors have thus far received the news positively. Indeed, expectations are that the acquisition will quickly become earnings enhancing thanks to the enlarged economies of scale and synergies from a leaner operating model. The deal is expected to conclude in November (it is still subject to approval from the Competition and Markets Authority) and investors will then be keeping a close eye on how efficiently management are able to integrate the new stores.

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Points of View: UK interest rate cut

The Bank of England’s Monetary Policy Committee (MPC) voted to cut benchmark interest rates to a new record low of 0.25% last week. This, however, formed only part of a broad set of measures aimed at preventing the economy from suffering a post-Brexit slump. The new stimulus package also includes £70bn of bond purchases and the introduction of a Term Funding Scheme for helping banks to pass on the rate cut to consumers.

As per previous rounds of quantitative easing, the central bank plans to purchase an additional £60bn of gilts (UK government bonds). This is designed to help reduce the longer term cost of borrowing and encourage companies to invest, stimulate growth and support employment. In contrast to previous packages, the central bank plans to purchase corporate bonds with the remaining £10bn, thereby lowering companies’ cost of borrowing and allowing them to fund further investments.

Concurrently, the new Term Funding Scheme will provide as much as £100bn of new funding to banks at interest rates close to the new 0.25% base rate, thus helping and encouraging them to pass on the lower interest rates to households and businesses. Importantly, the scheme will charge a penalty rate if the banks do not lend.

Looking at the implications for investors, the additional monetary easing has initially caused sterling to slump back to its post Brexit lows against the dollar. As one might expect, the announcement of additional bond purchases has forced prices up and yields down. Incredibly, gilts with a duration of 10 years presently yield a meagre 0.7% – a starting point from which long term investors can hardly expect a good return. The UK stock market has also reacted positively – not least because a weak pound is good news for UK-based international companies. Looking forward, it will be interesting to see whether the new Chancellor, Philip Hammond, initiates complementary fiscal action via his Autumn Statement later this year.

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Stocks in Focus: Unilever

This week I am looking at Unilever, following the recent release of its half-yearly results. In addition to an encouraging set of figures, the consumer goods company also announced the $1 billion purchase of Dollar Shave Club, a California-based internet subscription business that delivers cost-effective razors and other personal grooming products. Management have previously identified men’s grooming as a growing market trend and as such it is not surprising that they are increasing their exposure to this category, although their choice of acquisition target is somewhat unexpected.

At first glance, the price paid for Dollar Shave Club appears expensive. The four-year-old start up is barely profitable and revenues are forecast at a mere $200m for this year – so what do Unilever gain from such a high price tag?

Well, what this business does offer is a completely different business model to their competitors, with a modernised approach. The subscription-based service enables direct-to-customer e-commerce capabilities, as opposed to the historical approach of selling products in stores via a third party. This new offering to consumers has already proven a success and despite the short time scale, Dollar Shave Club already holds 5% of the men’s razor blade market and is growing at an extraordinary rate, with sales growth of 30% predicted for this year. In contrast, the personal care group Edgewell, which owns the well-known brand Wilkinson Sword razors expects a modest annual growth of 2-3% over the long term.

As market conditions continue to prove difficult and consumer demand remains fragile we are likely to see an increase in unusual acquisition activity across the sector. Rather than looking at long-standing mature businesses, companies such as Unilever are progressively looking at smaller, younger companies and the passionate entrepreneurs that come with them in order to revive demand.

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