Investec cautious about Poundland's longer-term growth

Broker Investec has initiated coverage on Poundland with a 'hold' recommendation and a 300p price target, saying it sees "better opportunities elsewhere with less risk".

The integration of the 99p Stores acquisition is expected to add 69% to full year pre-tax profit over the next three years and return Poundland to around 20% growth in the 2017 and 2018 financial years, but Investec has concerns about the quality of the sites, estimating "at least a third were bought from administration".

Once integration is complete in 2018, analyst Kate Calvert said she expects the longer-term growth rate to fall to a high single-digit percentage growth, with roughly 985 stores, unless the pilot in Spain takes off.

But there are also concerns about Poundland’s ability to offset the costs of the government's proposed Living Wage, meaning the broker expects the underlying business’ profits will track sideways over the next three years, with wage inflation offsetting the contribution of profit from new space.

"Not having flexibility to put up prices and a low circa 4% EBIT margin makes Poundland vulnerable, in our view," Calvert wrote, adding that short-term headwinds from currency rates and tough comparatives are likely to hit interims due on 19 November.

"An full year 2018 PE of 13.5 times feels about fair for a business with a high single digit longer term growth rate, post the integration benefits of the 99p Stores acquisition.

"We feel it will be too early for the Spanish business to have a material impact given it is still a trial."