The IPO window was supposed to be slamming shut, but it seems no one told B&M Bargains.
The Liverpool-based discount retailer priced its IPO at the upper end of guidance and saw the shares rise a further 6.7% on the first day of conditional trading, valuing the company at a whopping £2.9bn.
B&M’s early success is in marked contrast to other recent retail IPOs which have struggled to attract investor demand and either saw their floats pulled or the shares perform poorly in conditional trading.
It is understood that B&M covered the float around four times at the 270p level, with institutional investors seemingly content to accept a valuation of 25.7 times earnings.
So how did B&M remain unaffected by what one observer recently termed “IPO indigestion”?
Most obviously B&M has a compelling growth story from an already healthy base.
Last year it saw sales grow by 28% to £1.29bn, while EBITDA rose 24% to £130m (representing a net profit of £105m). The company sees potential to more than double its UK stores to 850 outlets and has mooted opening 350 outlets in Germany after buying 50-store strong German discounter Jawoll in April.
One of the primary reasons investors have bought into the company’s potential is that exposure to the massively expanding UK discount market is hard to find.
Investors are unable to buy shares in privately held Aldi and Lidl or invest directly in Associated British Food’s-owned Primark, for example.
That rarity premium has also been helped to an extent by the performance of value-led contemporary Poundland since its March listing. Poundland floated at 300p and is currently trading at 332.2p, making it one of the only 2014 floats still trading at or above its IPO price (though valued at less than a third of B&M).
Although pricing at the higher end of its initial 230-290p guidance, B&M has also resisted the temptation to be more aggressive on price and managed to leave something on the table for the secondary market.
The float proves that investors still have appetite for retail IPOs – recent evidence simply suggests that the market has become far more discerning.
In contrast to B&M’s warm reception, clothing retailer Fat Face was forced to pull its IPO last month due to a lack of demand and Card Factory and Game have priced their offerings at the lower end of guidance in recent weeks.
More widely Saga, the holiday and insurance company, received a similarly muted reception to its listing after its shares priced at the lower end of guidance and barely moved in the secondary market.
B&M will, however, be mindful that other retail listings this year, including Pets at Home, AO World and McColl’s, have received a frothy reception, in conditional trading only for their shares later to plunge below the initial offer price.
The scale of B&M’s success is illustrated by the fact that it now teeters on edge of entering the FTSE 100 alongside Tesco, Sainsbury’s and Morrisons. Its current valuation leaves it just shy of the £3bn valuation of the FTSE 100’s smallest constituent.
The scale of the challenge ahead is no less daunting. B&M’s grocery contemporaries trade at a fraction of B&M’s multiples (Tesco is the highest at 12.3 times earnings, while Sainsbury’s and Morrisons are at 8.9x and 6.7x respectively). The company will be well aware of the pressure it will come under once it enters unrestricted trading next week to justify that premium.
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