More on Boots
Boots H1 results
Negative like-for-like growth in the core retail business was the result of regulatory imposed price cuts and the company claims the underlying like-for-likes were almost flat. Although the overseas businesses produced high growth (12% like-for-like) but as these generate only 1.3% of retail sales their effect at the group level is negligible.
Profitability over the half year is also difficult to assess. The price cuts have apparently had little effect on profitability. The main reason for the 10% drop in trading profit has been a 6% increase in operating costs as a result of expenditure on expansion.
The planned merger with Alliance Unichem, and the sale of the pharmaceutical manufacturing business to Reckitt Benckiser, means that investors in Boots now are likely to end up owning a company substantially different from Boots as it was in the past.
The combined group plans to continue Alliance Unichem’s strategy of acquisitive expansion. The need for cash to fund this means that the combined group is likely to pay out much less of its profits as dividends. We expect a dividend yield of around 2%, approximately three percentage points lower than Boots was expected to pay prior to the merger. Income investors are likely to want to reconsider their holdings in Boots.
Although Alliance Unichem’s acquisitiveness has been successful in the past, there is an unquantifiable risk that the step change resulting from merger with Boots will change things too much for the same strategy to work. There will also be significant expenditure and management time required to merge the operations of the two companies - although it will yield some synergies.
The risks of supermarket competition remains and we do not believe that even the merged group will come anywhere near matching the low costs of supermarkets.
Boots shares (at 610p with Alliance Unichem at 764p) now (probably) represent and indirect investment in the merged group. Investors are buying this on a prospective PE of around 14×, with a lower yield as discussed above.
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