Is a Flotation Next for Poundland?

Poundland, the fast-growing discount retailer where everything is for sale at £1, looks like it might float its shares on the stock market in the near future.

Poundland is currently 75% owned by venture capital firm Warberg Pincus with the remaining shares split between over 100 Poundland management and employees. The latest income statement published by Poundland makes for impressive reading.

Sales (turnover) rose by 15% to £880m in the year ended March 2013 and Poundland achieved a gross profit of £323m on those sales compared with £282m in 2012.

A summary of the income statement is provided below:

The store portfolio increased by a further 69 shops bringing the total to 458 outlets, including 26 shops in Ireland.

Poundland was also able to generate strong positive cash flow during the last 12 months with net borrowings on the balance sheet falling to £12m from £26m the previous year.

Why might Poundland decide to opt for a stock market flotation?

One strong reason is the current ownership of Warberg Pincus. Their stake, invested three years ago, valued Poundland at around £200m. Poundland's current profitability (approx £20m net profit per year) and its strong growth rate suggest that the business might now be worth significantly more than £500m. A stock market flotation would enable Warberg Pincus to exit from their investment with a strong return - several times what they paid for the business.

Another reason why Poundland might want to float is to raise fresh capital to fund their continued expansion programme. When he announced the 2013 financial results, CEO Jim McCarthy highlighted the potential scale of the opportunity:

"In the UK, Poundland is powering ahead. Our single price point and our amazing value are appealing to an increasingly broad section of UK shoppers. We opened a net 51 new stores in the year and that rate of growth has continued into the current year. I’m confident that over time Poundland will have over 1,000 stores across the UK."

A portfolio of 1,000 would represent a doubling of the existing size of the business and would require substantial investment in store opening. Although Poundland's stores operate firmly in the discount sector, their store fittings are still relatively expensive! Significant new equity finance raised from a flotation would enable Poundland to reduce or eliminate its existing bank debt and also help finance the store opening programme.

A third reason why Poundland might decide to float is the 25% of shares held by management and employees. A flotation of some or all of the Poundland shares would create a public market in those shares which would enable existing shareholders to realise their investment - if they choose to. It might also enable Poundland to extend share ownership amongst its employees - a common arrangement among public companies.