McColl’s Retail Group – a time for a bold gamble?

A week ago, this group announced a very disappointing Trading Update showing that it was still having problems with its supply chain.

Of course, McColl’s Retail Group (LON:MCLS) is not alone with so many other companies in the retail sector having suffered similar pressures.

The group’s shares collapsed from 19p to 13.5p in reaction.

They have since slipped even lowe, touching 11.25p at one stage before closing last night at around the 12.25p level.

Reckless of me, perhaps, but I would fancy a bold gambling stance right now.

Up and then down, down and down

Having profiled the company way back in late April this year, when the shares were 32.5p, I was pleased to see them progress up to 40p in July, that was at the time that Morrisons had agreed a cash bid for its equity.

Within a month a somewhat ‘leaky’ City declared that McColl’s was about to do a fund raising – then the shares eased back to around the 22p mark upon confirmation that a capital raise was underway.

By 12 August the group’s interim results were accompanied by a £30m Placing and Open Offer @ 20p a share.

The shares held at that price before drifting to 18.75p by late September.

Time to pick up that knife

The subsequent fall in price due to the recent news is understandable.

However, I now reckon that a speculatively chancy purchase could pay off those brave enough to take this current opportunity.

I know that the market adage of ‘never try to catch a falling knife’ has frequently proved true.

Let it fall to the floor before picking it up and not suffering cuts in the process. Similarly with falling shares.

The business

Founded way back in 1901, McColl’s today is a leading community retailer, with an estate of over 1,200 managed convenience stores and newsagents.

The group operates McColl’s and Morrisons Daily convenience stores as well as Martin’s newsagents across the UK, except in Scotland where it operates under its heritage brand, RS McColl.

Across the country over five million customers are served by group stores every week.

McColl’s convenience stores and newsagents are mostly located close to residential areas, in neighbourhoods and villages, for ease of access.

The stores operate in locations with little competition and have therefore performed resiliently during the pandemic, particularly against retailers located in high streets and urban city centres which saw steep footfall declines during the same period.

The convenience stores provide a vital service to many communities across the UK including everyday access to fresh food and groceries plus a range of services such as ATMs, bill payment, and internet collection points.

The group is also the largest operator of Post Offices in the United Kingdom with some 516 in operation.

Morrisons deal has a lot of promise

The group has an important agreement with Morrisons, which is the wholesale supplier for its whole estate – groceries, tobacco, confectionery, beers, wines and spirits.

It is now kitting out some 350 of its group stores under the Morrison’s Daily brand. This is a strategic expansion for the group, it holds tremendous potential over the coming years.

Broker’s View

Analyst Matthew McEachran, at the group’s brokers Singer Capital Markets, is estimating that the current year to the end of this month will see revenues of £1.13bn (£1.24bn) while showing a loss of £8.1m (£1.4m profit).

For the next year he sees sales of £1.19bn then up to £1.27bn in 2023, with a £1.2m profit in 2022 then a £8.6m profit in 2023.

Those estimates would see 0.3p of earnings in the next year, then up to 2.4p per share by 2023.

Over at Peel Hunt, their analyst Jonathan Pritchard has a ‘buy’ note out on the group, with a price objective of 40p. He says that “We would be buyers in weakness, as the M Daily transformation is what investors signed up for, and that is what will ultimately be a major positive.”

We will get an even more recent indication from the group come its end-year Trading Update that is due out on Wednesday 8 December.

My View

My very bold, very speculative move now would be to buy four times what you held upon my profile price, that would drop your average price down to 16.5p and give you a fighting chance to turn a profit as the group’s recovery gets underway.

Remember that even the group’s directors were big buyers in the August fund raising at 20p each. Especially so, as CEO Jonathan Miller bought another 15m new shares for himself at that price.

This dip in McColl’s fortunes will not last and gamblers could well get very lucky.

(Profile 26.04.21 @ 32.5p set a Target Price of 41p)