B&M gnomes light up the Brexit gloom

There’s an offer on. For just £3.99, you can own a mooning garden gnome whose exposed posterior lights up at night. I know. Only £3.99!

Seriously though, B&M, the wannabe Woolworths and purveyor of questionable garden accoutrements, provides a rare bright spot amid the Brexit market mayhem.

With what seems like an inevitable recession in the offing, this is the discount retailer’s time to shine. And, like its gnomes, B&M’s shares start from a low base. At 257p, the stock trades at a shade under its 270p float price of two years ago and has a price to earnings ratio — 13 times 2018 forecasts — that lags rivals.

In March it opened its 500th store and Simon Arora, the chief executive who, with his family, owns a £540m stake, has shown no signs of tamping down his ambitions on these shores or in Germany, where it has a rapidly growing network of stores.

The market has been surprisingly discriminating in its treatment of shares post-Brexit. Gold and silver miners have soared, while housebuilders and brickmakers have plunged. Yet it feels like B&M, which is off 11% in the past week, is caught in the wrong current.

Peel Hunt, the broker, has slapped a 440p price target on the stock. The company is coming off a year where pre-tax profits grew 150% to £155m. In May it announced a £100m special dividend.

Its model should prove sound in hard times to come. The company uses cheap groceries to lure shoppers. Once there, they stock up on dirt-cheap brands that B&M buys in such bulk that it can get better rates than even Tesco. Some of its non-food offerings, such as kettles and mops, are made on demand for B&M in China and sold at knockdown prices.

The upshot is that B&M is very good at piling it high and selling it cheap. It has healthy margins — more than 30% — and the balance sheet to capitalise on others’ stumbles. Its debt ratio has fallen to just 1.75 times earnings. Buy the shares, not just the gnomes.


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