Directors’ deals: The Arora brothers enjoy a Christmas bonus

If you’re planning on selling a decent chunk of your remaining holdings at a discount retail store, doing so right after you’ve had your “best Christmas ever” seems like the best time.

These are the words Managing Director Simon Arora used to describe trading at B&M European Value Retail in the three months to December 25. The early supply of products meant it kept shelves full, leading it to raise its adjusted cash profit forecast for the year to March to between £605-625million, ahead of the consensus estimate of £578 million.

A week after the earnings announcement, Goldman Sachs said it was acting as sole bookrunner for a 40 million share placement with institutional investors on behalf of SSA Investments, an investment vehicle based in Luxembourg belonging to the Arora family.

The shares were sold on January 18 at 585p per share, earning brothers Simon (chief executive), Bobby (group commercial director) and Robin Arora a total of £234m. The size of their remaining stake in the company has been reduced to 7% from 11%, but they have pledged not to sell any more shares for another 180 days.

The brothers are well off – their combined net worth is over £2.5billion, according to the Sunday time Rich list. This was largely accrued through their ownership of B&M.

When they bought the company in 2004, it had only 21 stores. Over the next 10 years, they rolled out another 246, bought and converted another 106 stores to B&M, and launched larger footprint stores out of town that became the model for future growth along the way. They sold part of the business to private equity firm Clayton, Dubilier & Rice in 2012 and another in an initial public offering in 2014.

The number of stores increased from 373 at the time of the IPO to 1,110 at the end of the third quarter, including 693 B&M outlets.

B&M has done well during the pandemic given its value offering and out-of-town locations, but some analysts believe its appeal will wane as people return to city centers and have fewer money to spend on discretionary purchases, such as household items. Others, however, think the revenue squeeze will make its value offering more attractive.

In the short term, the sale does not seem too well received by investors. B&M shares are trading well below the closing price the day before the placement announcement.

Bytes Technology chief cashes in on some of his tokens

There are many “lockdown businesses” that exploded during the pandemic but are now undergoing a correction. In the UK, shares of e-commerce retailers Asos and AO World lost most of the gains they have made in the past two years, while Netflix lost 20% of its valuation after announcing that growth subscribers is expected to slow next year.

A similar story unfolded at computer companies Bytes Technology and Softcat. The massive adoption of working from home has forced companies to invest heavily in updating their IT infrastructure and transitioning services to the cloud. This increase in revenue, coupled with lower costs through reduced travel and event budgets, helped boost profits for both companies. Softcat saw its operating profit rise 27.4% year-on-year to July 31, while Bytes’ operating profit jumped 19% in the six months to the end of August.

Bytes’ gross billed revenue increased 27% to £638m, with growth driven by software and services. Since Bytes primarily resells computer software and hardware, its operating margin is a modest 9%. However, careful working capital management helped it convert 107.5% of its operating profit into cash.

Despite their impressive pandemic results, Bytes and Softcat have lost 18% and 13% of their value, respectively, since early December. Still, trading at valuations above 30 times earnings looks pretty steep for companies with such modest margins and there are fears that a slow economic recovery will mean companies could have less money to invest in IT.

Those concerns could have factored into chief executive Neil Murphy’s decision to sell £2.55 million of his shares on January 14, although he said they were “for tax planning purposes and estate”.

Whether shares of Bytes have reached a near-term peak or not, the firm that the IT company is unlikely to experience the same degree of correction as e-commerce “lockdown stocks” which are currently facing double threatens to have a customer base with less money to spend while dealing with rising shipping costs.

Consumers may buy less clothes this year, but many IT jobs are recurring and will remain essential, especially as working from home shows no signs of slowing down. The FactSet consensus is that earnings per share for Bytes grow to 15p in 2023 from 8p at the end of 2021. Growth may slow but it is expected to continue.

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