Recent share price weakness in B&M European Value Retail (BME) presents a compelling entry point for growth and income investors as the variety goods retailer’s value proposition leaves it well positioned for inflationary times.

As household bills rise, the groceries-to-general merchandise seller should benefit from cash-strapped consumers trading down.

Sales surged to an all-time high in a Covid-inflated year to 27 March 2021, though B&M’s shares are down 12% year-to-date on concerns the pandemic boost will fade and with investors reading too much into a share sale by CEO Simon Arora.

Liberum Capital says B&M’s value proposition means it is up to 15% cheaper than the major grocers on everyday branded items, which should enable it to capture a greater share of existing customers’ wallets while attracting new shoppers.

The broker believes B&M’s share of a £300 billion total addressable market in the UK alone remains modest at 1%, so the retailer ‘does not need to take material share from any particular competitor or in any given space to keep growing’.

Most growth stories in the retail sector are online companies, but B&M’s expansion is unusual in that it is all about physical store rollout, says fund manager Ken Wotton who holds the stock in the LF Gresham House UK Multi Cap Income Fund (BYXVGS7).

Wotton also highlights B&M’s ‘exceptionally strong’ management team and an attractive model of ‘relatively low capital employed and high returns’ when opening new outlets, yielding a swift payback.

‘In an environment where the consumer is cost-conscious, B&M is in a good position as it is able to attract new demographics of customers who are looking to trade down to save money, and once they’ve experienced the business they stick with it,’ he adds.

In light of the massive Covid boost, Liberum forecasts a decline in sales for the year to March 2022, though growth should resume thereafter. The broker forecasts pre-tax profits of £521 million (2021: £540 million) this year, ahead of £493 million and then £537 million in 2023 and 2024 respectively.

B&M trades on 13.5 times forecast earnings for 2022 which is way below the peak forward multiple of 27 times, and a historic average 12-month multiple of 19 times since B&M joined the stock market in 2014.

This represents cracking value for a retailer with good growth prospects, strong gross margins thanks to direct sourcing and the cash generation to expand its store estate while paying dividends, with a 3.7% prospective yield.

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