CMO Group – a digital disruptor with massive growth potential

By now regular readers will know that I am keen on the UK construction market, despite all of the hassles that it has had to endure over the last couple of years.

However, Covid-19, driver shortages, supply line delays, delayed and suspended orders – none have really been too much for the better company managements to cope with and then still progress.

On the face of it, today’s profile company looks severely overpriced – if you are only looking for inexpensive ‘value’ situation stocks.

I still have a sneaking suspicion that CMO Group (LON:CMO) will show its true colours within the next year or so.

The business

Incorporated in 2008, what a year to set a new business up, the company was originally called Construction Materials Online.

That early title gives it away.

It floated on the AIM market in June of this year through Liberum Capital, and raised £45m in the process, of which £27.3m went into the company’s coffers for further development.

That valued the Plymouth-based company at £95m with the Placing price of the shares at 132p.

With the target of ‘disrupting’ a largely offline market worth £27bn, it is today the UK’s largest online-only retailer of building materials.

Online it offers market-leading ranges listing over 75,000 products through its seven specialist websites.

The group has some 350 supplier and manufacturer ‘dropship’ relationships.

It also has over 127,000 active customers.

Its websites

Have a look for yourself at any of the following to see the CMO style and offering: doorsuperstore.co.uk, drainagesuperstore.co.uk, insulationsuperstore.co.uk, roofingsuperstore.co.uk, insulationsuperstore.co.uk, tileandfloorssuperstore.co.uk, totaltiles.co.uk, and cmotrade.co.uk.

Not exactly ‘catchy’ names to the sites, but very descriptive though.

Each site is supported by high quality customer service, with technical expertise offered to customers.

An excellent part of the whole package is that the business is ‘asset light’ aided by the majority of the products purchased being delivered directly from the manufacturers to the customers.

Good equity spread

There are some 71.97m shares in issue.

Larger investors include Key Capital Partners (26.8%), BGF Investment Management (7.3%), Chelverton Asset Management (7.1%), Jupiter Asset Management (6.1%), Marlborough Fund Managers (5.4%), BMO Asset Management (4.4%), JO Hambro Capital Management (4.2%), Rathbone Investment Management (3.3%) and Dean Murray the CEO (3.0%).

Recent interims

Towards the end of September, the group announced its interim results for the six months to the end of June this year.

They showed a 63% increase in sales to £38.2m and a pre-tax profit of £0.5m, which compared to a £0.7m loss on the corresponding period last year.

The group declared that its market had remained buoyant, while it considered that it was managing the industry headwinds well.

Furthermore, it stated that in line with market expectations, the company looks to deliver double-digit sales growth for the trading year to end December.

Broker’s Views

Analyst Charlie Campbell, at Liberum Capital, is bullish about the group’s expansion prospects now that it is a publicly quoted enterprise.

Further growth can be both organic and through acquisition and he rates the shares as a ‘buy’ with a price objective of 230p.

For the current year he estimates £77.4m of sales (£52.4m), profits of £1.5m and earnings of 2.0p per share.

For next year he goes for £91.3m of sales, profits of £3.8m, with earnings of 4.2p.

The 2023 year could see £106.9m of revenues and £5.2m of profits and earnings of 5.5p per share.

As I stated earlier, this is on the face of it an expensively rated stock.

My View

It may well be that, but I reckon that it has something of a real growth van as it gets to use its quoted status. There are plenty of suitable ‘victims’ out there for this predator.

We should be getting a pre-close Trading Update sometime next month, which will focus more attention upon the group.

Ahead of the next set of corporate news from the group, with its shares at 165p, I am now setting a Target Price of 200p.