Booker to press ahead with Makro integration

The UK's leading wholesaler Booker Group has revealed a solid trading performance, and will press ahead with integrating its acquisition of Makro.

Total sales - excluding Makro - rose by 2.3% for the 12 weeks to 29 March. Non-tobacco sales were 4.3% higher, while tobacco sales fell by 0.8%. On a like-for-like basis total sales rose by 2.2% compared to the same period last year, non-tobacco sales rose by 4.2% and tobacco sales fell by 0.9%.

Total sales in the 52 weeks to 29 March 2013 excluding Makro were £4 billion, up by 3.5% compared to last year, and total like-for-likes were up by 3.3%. Sales to caterers rose by 6.2% and retailers by 2%.

Customer numbers increased by 5% to 504,000. In another positive sign, internet sales increased by 11% to £704 million.

The group said that profits for the 52 weeks to 29 March 2013 remain in line with expectations.

The wholesaler purchased Makro on 4 July and the Competition Commission is finalising its review of the transaction and, during this review, Booker is required to hold the Makro business separate from the rest its operations. The regulator has provisionally cleared the acquisition and it is anticipated that the final report will be issued by 24 April.

In the last quarter, Makro traded in line with expectations. Booker said in the statement that it remains confident it will be able to "improve choice, prices and service for caterers, retailers and small and medium sized enterprises" through the acquisition.

The company is continuing its expansion in India, opening its third branch in Mumbai.

The group had around £77 million in net cash at the end of the year, compared to £63 million a year ago. This is after paying a part cash consideration of £15.8 million for the Makro business.

Interactive Investor view

Yet again, sales have performed well, against tough comparisons, with Booker remaining in control of its levers for growth. Since returning to the stockmarket, Booker has delivered strong earnings and dividend growth and excellent cash generation. The market's attention will now turn to Booker's plans for Makro.

The integration of the acquisition is taking longer than originally hoped, but avoids any disruption from forced disposals as the Competition Commission has provisionally cleared all 30 depots.

Despite the regulatory delay to the timetable, 2014 guidance remains unchanged with a net £10 million coming from Makro, although 2015 onwards will show the real potential from this additional space.

Analyst view

Consensus is that the addition of Makro will enhance Booker's growth, with Panmure Gordon anticipating a 6% enhancement in 2014, 19% in 2015 and 21% in 2016.

The valuation looks high at 22.8 times price/earnings ratio, but cash generation should accelerate with the integration of Makro.

Analysts at Panmure Gordon commented: "We expect synergies from the deal, together with a profit turnaround at Makro, to move group operating margins from 2.4% in 2013 to 3.5% by 2019. We think that there is upside potential to these forecasts, with the potential for margins of 4% on a best case scenario.

"We are raising our forecasts slightly from £93.3 million to £95 million to reflect strong cash and margin management. We are assuming that Makro will enhance earnings and we believe that there is upside risk to our longer-term forecasts. We therefore remain buyers, with a target price of 130p."

Analysts at Investec commented: "We remain buyers of the stock on an increased target price of 134p."