Poundland – Value, quality or both?

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A few weeks ago the first single price store in Europe had an Initial Public Offering on the London Stock Exchange. Poundland became a public company with an opening share price of 300p per share. There was a lot of demand for the shares even though it did not have the hype or the status as some of the other major banking deals that happened in the first quarter.

The company, which has more than 500 stores across the UK and Ireland, completed its £750 million flotation on the 12th of March, raising £375 million for its management and it’s private equity backers. The firm, which hails from the West Midlands was 14 times oversubscribed at its floatation price of £3. This means if they had 1 share to sell, 14 people wanted it. This was primarily down to the efficient business model of the firm and the opportunity that investors saw in the firm that would continue to grow from strength to strength. This also combined by a realisation by some of the major supermarkets that consumers have now shifted from Quality to value as the economy attempts to recover from the recession. Morrisons CEO Dalton Phillips highlighted that there has been “fundamental shift in how customers view discounters” and that the company will invest £1bn over the next three years into cutting prices and improving its own-brand food range. This had a knock on effect on its competitors as £3bn was wiped off the value of Britain’s biggest food retailers.

What works well for Poundland is not only the potential mentioned above but also the business model. The retailer made underlying earnings of £45.4 million in the year to March 31, up from £39.3 million in the previous year. Revenue rose to £880 million which showed an increase of 15%. The company is targeting a doubling of its British stores to more than 1,000 as well as further international expansion.

Poundland so far has been a solid investment opportunity for investors worldwide. Demand for the stock drove the share price up 23% on the close of business on day 1 and is now trading around the 380p mark 3 weeks on. Do the maths – a £3000 investment would’ve returned you £800 before capital gains tax in two weeks. Pretty good right?

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