Poundland unveils results as Steinhoff reveals 23% stake

Fresh from the previous day's revelation that South African giant Steinhoff was mulling a takeover, discount retailer Poundland posted preliminary results that confirmed a decline in profits and the continuing challenges the sector faces.

Steinhoff, the Frankfurt-listed owner of New Look and Virgin Active in the UK, confirmed on Thursday that it owns 23% of Poundland's shares.

Poundland's numbers for the year ended 27 March were largely in line with what the market and Steinhoff would have expected, with forecasts having been lowered over the course of the year as market conditions and the effort of integrating its 99p Stores acquisition took their toll.

Underlying profit before tax fell 13.5% to £37.8m despite a 9.3% lift in sales to £1.21bn. At the statutory level, PBT crashed 84% to £5.9m.

Diluted earnings per share were down 10.8% to 11.68p and a final dividend of 2p was proposed, meaning the total will be down 18% to 3.65p as cover was maintained at three times comparable underlying EPS.

Net debt stood at £12m.

Having on Wednesday responded to Steinhoff's news with an entreaty for shareholders are "to take no action" and await a further statement "if and when appropriate", on Thursday there was no mention in the FTSE 250 company's statement.

Chairman Darren Shapland instead mentioned the "challenging but transformative" year Poundland had completed, with the addition of 99p Stores making it Europe's biggest single-price discounter.

"With all of the 99p Stores now converted to the Poundland fascia, we are strategically well placed for progress under Kevin O'Byrne's leadership."

O'Bynre, ex of Dixons Retail, takes up the reins in two weeks' time.

In the first 11 weeks of the new financial year, sales increased 30.1% to £300.9m and underlying sales were up 28.6% but the first half is expected to be challenging, with negative like-for-like sales growth and continued disruption as the converted 99p Stores bed down into the larger estate before some improvement expected in the second half driven by these stores.

For the full year, if it remains an independent company, management plan to open 20 to 30 net new stores in the UK & Republic of Ireland, plus a small number of stores in Spain.

The acquisition is expected to add almost £17m incremental EBITDA, but integration costs of 99p Stores and other issues could top £13.5m, while Spanish losses at the non-underlying EBITDA level are predicted at between £2-3m.

Broker Peel Hunt said that the cutting of the dividend would normally would mean a tough day for the shares "but with Poundland now in play, short term forecast movements are of less significance than usual and we see more value in Poundland than the shares currently imply".

Steinhoff has until 1700 BST on 13 July to make a firm bid or walk away.

Peel Hunt's analysts added: "Steinhoff now has 23% of the shares and will clearly make a cash offer: we'd say that the starting point should be 250p, which only represents a EV/sales of 0.4x."