McColl's Retail - the big dividend yield is hard to ignore

McColl’s Retail (MCLS.L): Patience is a virtue much needed with this stock, but the yield is hard to ignore. In today’s unsurprising interims, to 31^st May 2015, revenues were up 3.4% and LFL sales down 1.9%, but these were a bit worse than the opening weeks of the period. Within the breakdown, the premium convenience, and food & wine formats (almost two-thirds of the store portfolio) were holding their LFLs, but the newsagents and standard convenience were down 4.7%. Price deflation, along with falling news and tobacco sales, were two key factors in this trend. The process of converting and evolving more outlets into the better performing formats continues, with 16 conversions and 25 additions taking the total to 837 (alongside 496 newsagents). They remain on course to hit their target of 1000 ‘formatted’ stores by the end of 2016. In addition they now have 483 in-store post offices, on course for 5000 later this year. Adjusted EBITDA inched up 1.9% to £16.2m, whilst pre-tax profits were £7.6m against a £4.0m loss, part of which was pre-IPO. Adjusted eps rose 45% to 6.1p and the interim dividend was 3.4p (effectively flat against last time’s pro-rated 1.7p). Net debt increased from £36.3m to £47.3m, but this was partly due to timing differences on creditor payments. On an adjusted basis the company quotes net debt as being down slightly at £35.3m, this being 0.9x historic EBITDA.

The competitive backdrop remains fierce, with Booker being notably active in building its estate. Deflation and the steady decline in news and tobacco do not help either. Neither does George Osborne’s sudden embrace of the Living Wage, which will push up their wage bill in the coming years. (As an aside, I suspect that cheaper shop assistants under 25 years old will become more marketable.) Yet McColl’s has the advantage of self-help as it improves the profile of its estate and increases the proportion of outlets that are in its preferred formats. (There is plenty to be done in my tatty local!) The shares have picked up from their lows, but are still only 158p. On say 15p of eps in FY2015, that is only a PE of 10.5x whilst a likely 10.1p dividend would be a yield of 6.4%. In FY2016, modest eps progress to say 16.0p takes the PE down to 9.9x, where a 10.4p dividend would produce a juicy yield of 6.6%. I can’t see this stock winning any beauty parades, but the high yield makes it worth supporting. (Neil Cumming^, 28^th July 2015)

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