Bottom Feeding - BME, DLN, and FSTA
Welcome to the inaugural edition of Bottom Feeding, a newsletter where we look at 3 companies trading at or around 52 week lows.
This week we’re going to start with 3 small-to-mid cap companies listed on the London Stock Exchange, in variety of different sectors ranging from commercial real estate to travel. Let’s dive in.
B&M European Value Retail S. A. (BME.L)
BME is value/discount retailer operating in the UK and France, under the b&m and Heron Foods brands. The b&m stores sell a range of general merchandise, groceries, and fast moving consumer goods (FMCGs), and are typically located in out of town retail parks or town centres. In contrast, Heron Foods stores are convenience stores located in local neighbourhoods and shopping parades, selling a range of ambient, chilled and frozen food.
The UK is its largest market, with 741 b&m and 335 Heron Foods stores, while France has 124 b&m stores.
In the year ending 30 Mar 2024, BME generated revenue of £5,484m (FY23: £4,983m), gross profit of £2,035m (FY23: £1,801m), operating profit of £607m (FY23: £535m), and net profit of £367m (FY23: £348m).
Total equity at 30 Mar 2024 was £734m (FY23: £720m), but pretty intangible given £921m of goodwill on the balance sheet. Net debt (excluding lease liabilities) at 30 Mar 2024 was £728m (FY23: £717m).
The company generated cash flows from operations of £746m in FY24 (FY23: £782m), which it used, amongst other things, to invest £123m in property, plant and equipment (FY23: £93m), and pay out £348m in dividends to shareholders (FY23: £366m).
Market capitalisation: £2.79bn
Valuation: Using FY24 figures, the shares currently trade at an earnings yield of c.13.2%, free cash flow yield of c.11.9%, and dividend yield of 12.5%. The company has a negative tangible book value.
Reason: Profit outlook has been pretty negative for FY25, despite significant investment in new store openings. Like-for-like sales have been down in each quarter, and the company has guided for full-year operating profit to be flat to down on FY24.
As a retailer with a large workforce, the company has been particularly impacted by the UK Government’s Autumn budget, which included significant increases to employer national insurance contributions and the minimum wage.
Additionally, the company announced on 24 Feb 2025 that the CEO would be leaving on 30 April, having held the role since Sep 2022.
Interest level: moderate to high
Derwent London (DLN.L)
DLN is a central London office focused real estate investment trust (REIT), with a portfolio of 63 properties, totalling 5.3m sqft.
In the year ending 31 Dec 2024, it generated net property and other income of £198.3m (FY23: £190.5m), an operating profit of £156.4m (FY23: £428.9m loss), and a net profit of £115.9m (FY23: £476.4m loss).
Total equity at 31 Dec 2024 was £3,539.8m (FY23: £3,508.8m), backed by an investment property portfolio valued at £4,670.1m (FY23: £4,551.4m). Net debt (excluding lease liabilities) at this time was £1,392.1m (FY23: £1,263.1m), with interest covered 3.9x by operating income.
The company generated £64.6m in cash flows from operations (FY23: £97.0m), and invested £101.9m (FY23: £98.0m) in principally property acquisitions and capital expenditure. It also paid dividends totalling £89.6m (FY23: £88.7m).
Market capitalisation: £2.07bn
Valuation: Using the FY24 figures, the shares currently trade at an earnings yield of 5.6%, free cash flow yield of negative 3.6%, dividend yield of 4.3%, and price to book value of 0.58.
Reason: There have been several negative property revaluations in the last few years, and cash flows from operations have been trending down, while net debt has increased. The dividend looks increasingly unsustainable and I wouldn’t be surprised to see it cut.
Interest level: low
Fuller, Smith & Turner (FSTA.L)
Fullers is a company I’ve covered extensively over at Firm Returns, and hold in own my portfolio at time of writing.
Having divested its brewery, it is now a pure hospitality business with 185 internally managed pubs and hotels, and 153 tenanted inns.
In the year ending 30 Mar 2024, the company generated revenue of £359.1m (FY23: £336.6m), operating profit of £27.7m (FY23: £10.9m), and net profit of £9.1m (FY23: £7.9m).
Total equity at 30 Mar 2024 was £431.3m (FY23: £442.6m), backed by property, plant and equipment carried at £581.9m (FY23: £583.3m). It should be noted however, that the property values recorded on the balance sheet are based on historical cost, which significantly understates their true value: north of £950m.
Net debt at 30 Mar 2024 was £133.1m (FY23: £126.8m), and interest expense was 2.46x covered by operating income.
Cash generated from operations in FY24 was £68.3m (FY23: £47.5m), which the company used to invest £27.2m in capital expenditure, purchase £12.4m of own shares, and pay £10.4m in dividends.
Market capitalisation: £299.3m
Valuation: If the company is able to return to its normalised earnings level, which I believe to be likely in the medium term, the current share price will offer around a 10% earnings yield, while the current dividend yield is 3.4%, and free cash flow yield is 14.8%.
Price to tangible book value is around 0.7x, and given the historical cost base, less than 0.5x realisable net asset value.
Reason: The share price has fallen since the Autumn budget last year due to fear of the impact of national insurance and minimum wage increases. Management has quantified the short-term cost at c.£8m if unmitigated through cost cutting/price rises.
Interest level: very high
If you want to read much more detailed research on individual companies, head over to https://www.firmreturns.com, where you’ll find a large library of articles and can sign-up to my free or paid newsletter.
I write 2-3 research reports a year for paid members, in addition to providing portfolio updates whenever I buy or sell shares.
Free members get updates on each of the companies in my portfolio, usually coinciding with a key event such as an earnings release. Companies currently covered include: FSTA.L, TBLD.L, ECOR.L, AV.L, STB.L, and WBD.