Multi-billion-pound retailer B & M European Value Retail SA (LON:BME) does indeed look good value to analysts at mid-tier Canadian investment bank, RBC Capital.
The spreadsheet jockeys said B&M’s valuation “looks compelling” as they made the stock their ‘top pick’ in the non-food retail sector and added it to their ‘European Equity Large Cap Best Ideas’ list.
READ: B&M expects record full-year earnings
“B&M has fallen c.20% from its 12-month share price high, despite being up c.25% year-to-date,” read a note to clients.
“It has de-rated, in our view, owing to its negative like-for-like sales performance and small earnings downgrades in recent quarters.
“Going forward, we expect a stronger LFL sales performance in Q4 and into FY20 driven by improved general merchandise ranges, particularly in homewares, which accounts for 15% of group sales, and easy prior-year comparables.”
Troubles in Germany
The UK accounts for most of B&M’s revenues and almost all its profit, and RBC reckons the variety retail giant is still growing the dominant side of its business, with recent troubles stemming from Germany.
In a recent survey, the investment bank found that the FTSE 250 group “ranked well” among UK consumers but “less so in Europe”, particularly in its German Jawoll business.
“Jawoll ranked relatively low on both price and quality, but better on range. [It] had a challenging year, which has led to significant range clearances and falling profits, however an increase in unified sourcing and better ranges should drive sales and reduce markdowns next year.”
Frozen food could be a big boon for UK business
Even if things do start to pick up abroad, the analysts expect future growth to still be driven largely by the UK operation.
“Continued space rollout [in the UK] and positive UK LFL sales should be supportive for earnings.
“We believe Heron Foods has continued to deliver strong growth. We think Frozen and Chilled Food is an attractive opportunity for B&M.
“Once its Bedford UK distribution centre opens in early 2020, B&M can further roll out its frozen concepts.”
Based on the experience of US firm Dollar General, RBC estimates that a frozen rollout could lift B&M’s like-for-like sales by 1-2% a year from 2021 once the new centre is fully up-and-running.
B&M shares were up 1.8% to 360p on Friday morning.