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Top line growth & margin enhancement BUY

This has proven a management story par excellence in recent years. In

our view, the re-rating has further to go on a 12 months basis.

� The recovery story. When Charles Wilson joined as CEO (in Nov 2005),

revenues were contracting at 5.9% p.a. l-f-l, EBIT was in marked decline and

net debt was £361m. By contrast, in H1 of FY10 l-f-l sales growth was 7.7%,

EBIT was up on this and net debt was only £4m. Actions pursued to restore

Booker’s fortunes (all discussed in detail within on pp6-8) have hardly been

rocket science but all of the accolades are justifiable for both the manner of

their implementation and the potential that still remains.

� Current trading. Q3 revenue grew by 6.7% l-f-l reflecting Booker’s improved

choice, price and service to its customers. Profits and net debt were indicated to

“remain in line with management expectations”.

� Booker’s strategy. This is based on expansion of the top line organically via:

‘Broaden’ actions which are upgrading customers’ cash & carry experiences;

expansion of the Direct (National Accounts) business; and expansion in India.

This should prove a lower risk strategy versus acquisitions-based expansion.

� Valuation. On a 28% tax basis (the tax charge will remain below the standard

rate to FY12) the CY 10 PE of 16.5x is no bargain. However, we are of the view

that the improvement underway has considerably further to go, especially as

there is a margin mix benefit as tobacco products diminish in relative

significance. We also consider a prospective CY 10 EV/EBITDA of 8.1x

attractive, particularly as Booker should remain strongly cash generative.

� Price Target. We set a PT of 52.6p on a 12 months basis which is based on

9.5x forecast CY 10 EBITDA. Upside scope of 14.3%.

Code BOK

Price c 46p close 29/1/2010

Market Cap £686.1m

Year End 31st March

Net Debt £4.0m 11/9/09

Shares in Issue 1,491.5m

Next Results Finals May

Share price Performance

H1-2008 H2-2008 H1-2009 H2-2009

Source: Fides sa

15

20

25

30

35

40

45

50BOK BOOKER ORD 1P

Source: Fidessa

Company Description

UK’s leading food wholesaler supplying

caterers, retailers & other businesses

Institutional Contacts

Analyst:

Charles Pick 020 3207 3232

[email protected]

Corporate broking:

Eddie Edmonstone 020 3207 3209

Tom Jenkins 020 3207 3263

Stephen Norcross 020 3207 3211

Joanna Weaving 020 3207 3248

Brian Patient 020 3207 3225

Simon Starr 020 3207 3251

Sales:

Michael Bell 020 3207 3264

Chris Jeffrey 020 3207 3221

Elizabeth Johnson 020 3207 3294

Dwight Burden 020 3207 3266

Rhys Williams 020 3207 3268

Sales Traders:

Mick McNamara 020 3207 3223

Mike Nally 020 3207 3224

Jeremy Smith 020 3207 3226

Ben Tonnison 020 3207 3227

Daniel Smith 020 3207 3210

Forecasts. NB, on 28% tax forecast EPS = 2.59p then 2.85p for PE’s of 17.8x then 16.1x

Year end 2007/08 2008/09 2009/10E 2010/11E

Data

Sales 3,078.2 3,179.2 3,398.6 3,534.5

EBITDA 62.3 72.5 80.3 86.0

PTP 36.2 47.2 55.0 60.5

Tax Rate 17.7 16.9 17.1 17.0

EPS (f.dil) 2.03 2.63 2.99 3.29

DPS 0.538 0.87 1.00 1.10

Ratios

EV/sales n/r 0.2 0.2 0.2

EV/EBITDA n/r 9.8 8.7 7.9

P/e n/r 17.5 15.4 14.0

Yield n/r 1.9 2.2 2.4

Cashflow yield n/r 4.9 4.5 5.0

EPS growth 116.0 29.6 13.7 10.0

Booker 1 February 2010

Booker 1 February 2010 Top line growth & margin enhancement

2

Investment case

This rests upon the following:

• We accept that the prospective PE on 28% tax is mid teens for FY11 or

16.5 x for CY 10 (est CY EPS of 2.785p). Seemingly no bargain and ditto

the CY 2010 yield of 2.3%. However, a CY 10 EV/EBITDA of c 8.1x is

cheap in our view, although there are no quoted UK peers to Booker.

• Actions being pursued by the current management team have further to

go as regards top line and net margin growth. Our estimates are in Table

10 but following H1 l-f-l sales growth of 7.7%, and 6.7% in Q3, we have

assumed 6.9% for 2009/10 overall and 4% for 2010/11. An EBIT margin

of 1.93% has been projected (11 bps ahead) and then 2.00% for 2010/11.

• The development of additional non-tobacco product lines will have a

further favourable margin mix effect. Tobacco product sales should

continued to decline in proportional terms, whilst Booker is on record

that it earns some of its lowest gross margins from these (1.5-2% vs up to

20% from some non-tobacco products).

• Management is of the view that 50% more trade could be

conducted via the 173 cash & carry outlets. This would generate

considerable operational gearing benefits.

• Booker Direct has growth scope and is diversifying a customer base

traditionally centred on small businesses. It has already gained work in

the public sector and with leisure clients.

• The expansion into India appears to have proven a success. There is

scope to add extra branches in Mumbai over time given its 20m

population: management has mentioned the scope for 10 branches there.

Others could follow elsewhere in India.

• As of July of last year, Booker moved from AIM to the main market. A

number of funds may still be lightly weighted in the shares.

• This is a mature group which should remain strongly cash generative: we

project cash generation pre dividends and after excluding a £7.2m

interest swap cost of £64.8m for 2009/10 and 2010/11 combined.

Table 1: Booker’s l-f-l sales record

H1

05/06

H2

05/06

Yr

05/06

H1

06/07

H2

06/07

Yr

06/07

H1

07/08

H2

07/08

Yr

07/08

H1

08/09

H2

08/09

Yr

08/09

H1

09/10

Yr

09/10E

Yr

10/11E

Total sales l-f-l -5.9 -5.9 -5.9 -2.5 n/a -0.9 0.4 n/a -0.3 1.1 4.3 2.6 7.7 6.9 4.0

Non-tobacco l-f-l -6.1 -6.0 n/a -3.0 0.3 -1.2 3.5 3.2 3.3 4.1 7.1 5.7 9.4 7.2 5.3

Tobacco l-f-l n/a n/a n/a -1.8 n/a -0.3 -3.9 n/a -5.4 -3.2 n/a -1.5 5.1 6.5 1.5

Caterers l-f-l -5.8 -4.1 n/a 1.4 3.9 -0.2 3.2 1.6 2.2 4.7 9.0 7.0 12.6 12.9 7.6

Retailers l-f-l -5.6 -4.5 n/a -2.7 -0.1 -1.1 -0.8 -2.1 -1.5 -0.5 2.3 1.0 5.5 4.1 2.2

Source: FinnCap based on Booker disclosures. The smoking ban in public places in England & Wales impacted mostly upon the retailers l-f-l numbers.

Valuation

We target a prospective calendar 2010 EBITDA ratio of 9.5x which

gives a PT of c 52.6p* for upside scope of 14.3%. At this level, the

calendarised fully taxed 2010 PE would be 18.9x with the calendarised

2010 yield 2.0%. *9.5x forecast calendarised 2010 EBITDA of £84.58m = £803.5m which after

debiting calendarised 2010 net debt of £0.8m and dividing by 1,527.3m f.dil shares gives the 52.6p PT.

A prospective CY 10 EV/EBITDA of c 8.1x is cheap

Actions being pursued are set to generate further benefits

50% more trade could be conducted at the existing cash & carry outlets

Indian expansion news has been fine thus far

Some funds may still be light in the shares due to the recent nature of the move to the main market

We set a PT of 52.6p


3

Overview

Booker is the UK’s largest cash and carry operator offering an extensive range of

branded and own label products. Whilst the majority of sales accrue from

customers collecting their own products at the group’s 173 branches, a free

national delivery service is available from 163 of these using the group’s own vans

(the other 10 outlets are too small to warrant it). Supply direct from the group’s 3

RDC’s (Regional Distribution Centres) located at Hatfield, Haydock and

Livingston, or from the Wellingborough-based NDC (where the HQ is located), is

also possible. Livingston is a shared site where logistics are sub-contracted. At

end March 2009 414,000 customers were being regularly supplied – mainly

restaurants and convenience shop retailers but including diverse other (mainly

small) businesses such as leisure outlets and pubs. Booker’s fortunes are

inextricably linked to those of its customers so a key aspect of its business

strategy is to improve their competitiveness via high availability levels of value for

money products. The past 30 months has witnessed considerable trading

difficulties afflicting many customers, including: the repercussions of the

smoking ban in public places in England & Wales on 1st July 2007; the effects of

recession; shrinkage in pub numbers; and pressures afflicting consumer

spending. Despite this, Booker’s results have been greatly improved.

Table 2: Booker customer numbers

End March 2008 % end March 2008 End March 2009 % end March 2009 D % 08/09 vs 07/08

Caterers 258,000 63.6 296,000 71.5 14.7

Retailers 72,000 17.7 72,000 17.4 n/c

Others 76,000 18.7 46,000 11.1 -39.5

Total 406,000 100.0 414,000 100.0 2.0

Source: FinnCap based on Booker Group Accounts

Operational analysis

Recent customer/product/activity splits plus forecasts are summarised overleaf.

The majority of revenues derive from retailer customers and from non-tobacco

products with sales to customers collecting products for themselves at cash and

carry depots still predominating. However, the element of revenues arising from

catering customers has been growing well whilst tobacco products (which carry

the lowest margins) are steadily diminishing in relative significance, albeit off a

high starting base. Tobacco product sales are largely made via retailers – often to

the classic small CTN-focused convenience shop. Deliveries from cash and carry

branches, or directly from the RDC’s or NDC, have been growing usefully of late.

The Hatfield RDC is the largest at c 409,000 sq ft, closely followed by the

Haydock unit at c 407,000 sq ft, with the Livingston facility c 284,000 sq ft. The

NDC at Wellingborough is c 168,000 sq ft. A notable contract win for Booker

Direct in 2008/09 (in conjunction with DHL, which is undertaking the logistics),

was with HM Prisons in England & Wales; this illustrates how Booker does not

merely supply private sector SME’s. Booker Direct is also now the largest supplier

of food and drink to the cinema industry which has enjoyed a ‘good recession’ as

Cineworld plc recently highlighted.

The UK’s largest cash and carry operator

The % of higher margin catering customer revenues is growing with the reverse generally true for low margin tobacco products


4

Table 3: Key facts

Revenue 05/06

Revenue 06/07

Revenue 07/08

Revenue 08/09

Revenue 09/10E

Revenue 10/11E

Est 10/11 vs 05/06 (%)

Caterers (£bn) 0.80 0.83 0.85 0.93 1.05 1.13 41.3

Retailers (£bn) 2.13 2.10 2.15 2.19 2.28 2.33 9.4

Others (£bn) 0.11 0.08 0.08 0.06 0.07 0.07 -36.4

Total (£bn) 3.04 3.01 3.08 3.18 3.40 3.53 16.1

Non-tobacco (£bn) 1.77 1.75 1.84 1.95 2.09 2.20 24.3

Tobacco (£bn) 1.27 1.26 1.24 1.23 1.31 1.33 4.7

Total (£bn) 3.04 3.01 3.08 3.18 3.40 3.53 16.1

Cash & Carry collect (£bn) 2.55 2.53 2.50 2.50 2.54 2.57 0.80

Cash & Carry delivery (£bn) 0.49 0.48 0.50 } 0.68 } 0.86 } 0.96 n/m

Direct (£bn) 0.00 0.00 0.08 } } } n/m

Total (£bn) 3.04 3.01 3.08 3.18 3.40 3.53 16.1

Caterers (%) 26.3 27.6 27.6 29.2 30.9 32.0 570 bps

Retailers (%) 70.1 69.8 69.8 68.9 67.1 66.0 -410

Others (%) 3.6 2.6 2.6 1.9 2.0 2.0 -160

Total (%) 100.0 100.0 100.0 100.0 100.0 100.0 n/r

Non-tobacco (%) 58.2 58.1 59.7 61.3 61.5 62.3 410

Tobacco (%) 41.8 41.9 40.3 38.7 38.5 37.7 -410

Total (%) 100.0 100.0 100.0 100.0 100.0 100.0 n/r

Cash & Carry collect (%) 83.9 84.1 81.2 78.6 74.7 72.8 -1,110

Cash & Carry delivery (%) 16.1 15.9 16.2 } 21.4 } 25.3 } 27.2 n/m

Direct (%) 0.0 0.0 2.6 } } } n/m

Total (%) 100.0 100.0 100.0 100.0 100.0 100.0 n/r

Source: FinnCap. What became Booker Direct comprised the former Blueheath Holdings’ Internet-based wholesale supply business. Blueheath has though now been

fully integrated within Booker and sometimes direct revenues are cited at £0.5bn+ p.a. i.e. comprising all of the delivery based operations – a source of possible

confusion, although Booker Direct relates to delivered sales made from the RDC’s or NDC. N/m = not meaningful. In the Blueheath transaction circular information

was given on a different basis for 2006/07 and showed tobacco sales split £1.2bn retailers/£0.1bn caterers whilst non-tobacco sales were spit thus: food & drink

£1.7bn (retailers £0.9bn/caterers £0.7bn/others £0.1bn); and non-food £0.1bn (all caterers).

Booker stocks 18,000+ product lines, including both branded and own label

grocery products spanning fresh and frozen food, beers, wines, spirits, tobacco

and non-food items. Products stocked include familiar brands but also c 2,000

own label lines. The latter including Booker-owned own label brands such as:

Chef’s Larder (a catering brand); Lichfields Luxury portion packs (a brand for

packs supplied to hotels, b&b’s and pubs); Malt House Vintners and Chekov (used

for wines and spirits); Red Band (tobacco products) and Happy Shopper

(products for retail customers). Booker has also licensed the Euro Shopper brand

for UK use until 2017; this is used to sell certain products exclusively to

independent local shops at highly competitive prices. In October 2009 Booker

extended its Euro Shopper brand to include cornflakes, bleach, chewing gum,

noodle snacks and tissue with 30,000 retailers now purchasing Euro Shopper

items reflecting their popularity with consumers (sales are now £60m p.a.).

Booker’s cash and carry branches average 47,000 sq ft, although 4 are >100,000

sq ft and 12 are <20,000 sq ft. The 414,000 customers as of end March 2009 have

Booker owned and licensed brands: Chef’s Larder, Lichfields, Euro Shopper etc

The cash and carry branches average 47,000 sq ft


5

already been noted and in the H1 2007/08 analysts briefing (not repeated since)

there was a useful split to catering and retail customers reproduced below:

Table 4: The splits provided at the time of the H1 2007/08 results briefing for catering & retail clients

Catering categories

Catering customers % split catering customers

Retail categories Retail customers % split retail customers

Public houses 38,000 14.7 Premier 2,000 2.7

Fast food 49,000 18.9 Club 2,000 2.7

Accommodation 29,000 11.2 Convenience 26,000 35.1

Other 143,000 55.2 Other 44,000 59.5

Total 259,000 100.0 Total 74,000 100.0

Source: FinnCap based on the 12th September 2008 analysts’ presentation then on www.booker.co.uk

Catering splits require no explanation, although note that a butchery service is

offered in 160+ branches and Booker has become the largest catering butcher in

the UK. Sales here are £120m p.a. with a ‘prepared to orders’ facility option

available, all meat traceable and prices at least 30% cheaper than retail butchers.

A shortage of butchers in 2009 even led to Booker training 40+ of its staff to

ensure good service.

In the case of retail splits, Premier customers are independent parties who trade

under this Booker owned brand name: the group subsidises the fit out of the

store’s fascia, signage and other imagery in return for specified minimum spend

contracts. Sales of Booker products into Premier branded stores were estimated

at circa £470m in 2006/07 (+10% and 15.6% of the group total then) although no

updated number in this format has appeared since. As of end March 2009 there

were 2,200+ Premier branded stores making it the 3rd largest symbol group in the

UK. Such symbol groups have become a major force in the convenience sector

(see Appendices) with the Premier brand created in 1994. Membership had

grown to 2,392 outlets at 13th October 2009. In 2009/10 Premier has been

relaunched with new classifications for medium and large stores plus a new fascia

called Premier Express for convenience stores (known as c-stores) of under 800

sq ft. The relaunch has been accompanied by improved IT. The Grocer on 5th

December 2009 cited how in the first 8 months of 2009/10 the Premier Express

fascia had gained 130 new stores versus the 100 Booker had expected for all of

2009/10. The sales director for retail was quoted as aiming to recruit 1,000+ new

Premiers in the next 3 years. Premier customers are also offered the option of

joining Booker’s Retail Club. This had c 1,850 customers at May 2007, when the

Blueheath Holdings transaction circular was published, with 2006/07 sales given

as £261m or 8.7% of the group total (a number not disclosed since). Belonging to

the Club enables members to participate in special promotions.

1,100 suppliers are used globally, the aim being to develop a mutually profitable

enduring partnership rather than continually changing sourcing. Suppliers range

from multinationals to small local concerns. Products are accessed from 300

manufacturing sites located in 30 countries so handling supply chain

complexities is paramount. No products are stocked which could antagonise the

public, or arouse health concerns. E.g. no GM ingredients are accepted in own

label products and labelling guidelines for additives, nutrients etc must be met

plus legislative requirements, e.g. for tobacco products.

Booker has become the largest catering butcher in the UK

The near 2,400 Premier customers are independent parties who use this symbol brand

1,100 suppliers are dealt with and Booker seeks to develop long term trading relationships


6

The recovery story in recent years

Table 5: The recent recovery story for Booker

Recovery phase & date period

FOCUS H1 05/06*

DRIVE H2 05/06*

DRIVE H1 06/07

DRIVE H2 06/07

BROADEN H1 06/07

BROADEN H2 06/07

BROADEN H1 08/09

BROADEN H2 08/09

BROADEN H1 09/10

Sales change (%) -5.9 -5.9 -2.5 0.6 2.5 2.1 2.1 4.3 7.7

EBIT (£m) 13 9 20 16 24 22 30 28 35

EBIT change (%) -54 -44 54 78 20 38 25 27 13

Net debt (£m) 361 125 70 77 47 47 29 25 4

Source: FinnCap. Taken from the Booker 2009 Accounts but modified. * Results compiled under UK GAAP; all others compiled under IFRS. The ‘Focus’ phase

commenced in November of 2005, followed by the ‘Drive’ phase started in April of 2006 and the current ‘Broaden’ phase in April of 2007.

When Charles Wilson was appointed CEO in November 2005, as part of a new

senior management team, Booker had just reported sharply declining EBIT

reflecting a weak top line situation. Net debt surpassed £360m. As he has wryly

commented (cf the 10th March 2007 edition of ‘The Grocer’), “Calls from the bank

manager were not something we looked forward to”. A new strategy was

formulated which came from listening to customers: “It wasn’t nice to hear, but

they told us that our range had got worse, our prices had gone up and our

service levels had gone down”. The key facets of the triple-phased (ongoing)

recovery plan are shown below. All have entailed getting the basics right and

enabling Booker to grow its market share – nothing has involved rocket science,

whilst many aspects of change in the Focus and later Drive phases have continued

in the latest Broaden phase. Essentially a series of initiatives are having a

cumulative impact, largely generating benefits to Booker via a growing top line

and better sales mix. A virtuous circle has developed e.g. Booker’s lowered prices

and enhanced products range meant that by November 2009 it was able to

publicise how caterers switching to its depots could save £20k p.a. via purchasing

12 key category products covering everyday items such as bread, butter, bacon,

milk etc; a significant sum for most cafes, fast food outlets, pubs and restaurants.

Table 6: The 3 phases to Booker’s revitalisation

Phase Aims Aspects

Focus A focus on cash &

on the customer

A new organisation with business simplified. Better stock management to aid cash flow and ensure availability,

lower HQ costs and supply chain costs cut by 20%. New customer promotions to increase branch traffic

Drive The Driving of the

Booker business

via developing

increased customer

responsiveness.

A 'Choice Up, Prices Down, Better Service' offering. Launched the Euro Shopper and Lichfields Luxury portion

packs ranges, enhanced the fruit & veg range, increased promotional efforts in the branches and stocked a range

of 'Must Stocks'#. Also launched a 'Catering Price Check' to enable customers to check Booker list prices versus

those of some other food suppliers and in January 2008 a ‘First for Pubs’ range. Service upgraded via increasing

product availability and speed of service plus upgrading the role of the branch manager to give him/her more

responsibility and accountability. Regular customer surveys commenced in January 2007 (Booker now surveys

40,000 p.a.*) with the all-important question being “would you recommend Booker to a friend” with the YES

response rising from 78.2% in January 2007 to 79.3% in January 2008 and 83.9% in January 2009.

Broaden A broadening of

the business base

such that Booker

becomes the

biggest and best

supplier to small

business.

Improving the 'cash and carry experience' via further branch refurbishments, growing Internet sales, new

products and increased delivered services. The process of branch refurbishments commenced in 2006 but has

been taken much further under the Broaden phase to convert existing branches to ‘Extra’ outlets which enjoy a

brighter and lighter environment with improved layouts, signage and ranges. Improved product availability

commenced under the Drive phase but has been taken further whilst expansion of the Premier membership,

Retail Club and catering sector has been pursued. The PRIDE programme has been used extensively to upgrade

staff service levels.

Source: FinnCap but all derived from Booker materials in the public domain. # Each ‘must stock’ item is given a special green ticket on the shelf and depot staff are

charged with ensuring that these are always available. * Customer insights are also gained from these surveys in what is a data rich business.

By way of elaboration on these/other measures to improve customer satisfaction:

When Charles Wilson rejoined Booker as CEO in November 2005 matters were dire

Fuller details on specifics


7

• The ‘Prices Down’ action has led to everyday low prices for customers.

Booker has also offered season-long pricing so that catering customers

know they can manage their menus ex price fluctuations. These are

largely de-risked by back-t0-back deals with suppliers who therefore

bear any risks. ‘Cheaper by the case’ deals were introduced on 33 lines in

March 2007 and the following month saw ‘every day essentials’ whereby

highly competitive pricing was provided for bread, milk etc. In the

Appendices we show how Booker’s pricing for catering and retail market

segments went from being above average to below average.

• The ‘Extra’ branches have, in most cases, cost only circa £150k to convert

and have generated a payback of sub 12 months via the extra sales boost.

Before and after appearances for branches are dramatic, with non-

tobacco sales being boosted not only in the year after conversion

(typically by 3-5%) but also by a similar magnitude in Y2. By 11th

September 2009 the number of conversions was 81, with 95 the aim for

end March 2010. The Appendices include a chart of Extra conversions.

• The Euro Shopper brand was launched in July 2007, when it comprised

a range of 33 lines allowing the independent retailer to benefit from the

growth of discount retailing. It complements Booker Basics which offers

entry price products for caterers. Sales of Euro Shopper products were

running at £300k+ per week by end 2007/08 (when 18,500 customers

were purchasing some of these) whilst by end 2008/09 sales were

surpassing £600k per week with £1m+ per week attained in H1 of

2009/10. Booker Basics sales were running at £400k+ per week by end

March 2008. Sales of Lichfields Luxury portion packs were running at

£200k per week by end March 2009.

• The ‘First for Pubs’ range has been highly successful, with 2,000+ kegs of

beer per week being sold by end March 2008 and 3,000+ per week by

end March 2009. The Pub Favourite Meal Deals for £2.50 launched in

January 2009 has also helped independent pubs to compete.

• In November of 2007 Booker launched price-marked packs of fruit & veg

for retailers and also introduced Butchers’ Market, a range of price

marked fresh meat. Meat and fruit & veg are viewed by Booker as a

growth area due to rising demand for fresh products, with a focus on

growing these. Fruit & veg sales remain modest in the group context,

hence the 59% sales rise cited in the recent Q3 update (a case of growth

off a low base). Fresh products such as these generate good margins and

attract more custom to the branches which can boost other product sales.

• Chef’s Larder sales have expanded. This catering brand had sales of

£120m+ in 2006/07*, 4.0% of group sales then, although no updated

number has appeared since. *Given in the Blueheath transaction circular when it was

also disclosed that Malt House Vintner sales were £125m+ (4.2% of the total) in 2006/07. Again,

there has been no subsequent update. • Improvements to service have included extended branch openings and

improved delivery. The PRIDE staff training programme denotes

measures to enhance the Parking, Reception, Internal, Delivery and Exit

experiences of branch customers. 6,500 staff had been trained by end

March 2009.

• In March 2008 Booker launched free delivery (there is a minimum order

size which depends on whether a retailer or caterer is being supplied and

every branch manager also has some discretion here) and the prior

December removed charges for handling credit and debit cards. Both

Everyday low prices for customers

Branch refurbishments to improve depot visit experiences for customers

Sales of the Euro Shopper brand are now running at £60m+ p.a.

Measures to boost pub trade

Why Booker is keen to grow its fresh meat and fruit & veg offerings

Chef’s Larder sales must now be quite substantial

Service improvement actions e.g. PRIDE

With free delivery since March of 2008 whilst charges for card payments were also removed


8

actions have been well received by customers seeking ‘top up’ supplies.

Booker incurs costs of 1% for credit card transactions.

• Increased catering business especially has had a margin enriching effect.

In the 13th October 2009 analyst briefing Booker management

mentioned how whereas tobacco product gross margins are only 1.5-

2.0%, margins on some non-tobacco products can attain 20%.

• Extensions to the product range stocked are ongoing. In H1 2009/10 a

move was made into the chilled segment* via the launch of bacon, cheese

and cooked meats. * In December 2009 Booker reported it had doubled the size of its chilled

warehouse at the Hatfield RDC to 4,000 sq meters at a cost of £0.5m to ensure delivery of the

freshest possible products. Charles Wilson cited growth in chilled of 20% p.a. • Staff at each branch can be rewarded as a result of Customer Satisfaction

Scores: in 2007 the majority received a bonus for the first time since

2000. Customer surveys are also used to assess the performance of

product categories as well as branches. Customer ratings from a past

survey are included in the Appendices.

• An improved web-site (www.booker.co.uk) was launched in July 2007.

The growth in Internet sales is charted in the Appendices. Booker won

‘Online Retailer of the Year’ at the 2008 Retail Industry awards. 10% of

Internet customers were indicated to be new ones in the H1 2009/10

briefing. Most of the customers now ordering via the Internet ordered by

fax in the past and Booker do not feel there has been a margin benefit,

although parties using the web tend to spend more.

• Booker Direct sales were indicated in the 13th October 2009 analyst

briefing to be going well and running at £60m-£70m p.a. This compared

with the c £80m p.a. disclosed in the 2007/08 Accounts (which included

only 43 weeks from Blueheath) but it was mentioned that some business

had been exited as better quality customers were secured. The list of

Booker Direct customers provided last October is included within the

Appendices. Booker Direct is all about developing a delivered wholesale

operation to complement the traditional cash and carry business

(including the free deliveries now provided to these customers).

The L-f-l data shown earlier demonstrates Booker’s success. 75% of the H1

2008/09 7.7% l-f-l sales growth was extra business with existing customers and

25% business with new clients. The catering wholesale market was flat/slightly

lower in the 12 months to early Sept 09 so Booker is outperforming notably here.

Tobacco l-f-l sales were impacted by: the extension of the smoking ban in public

places to England & Wales in July 2007; market decline from health and higher

excise tax issues; and increased smuggling. Impressively, tobacco l-f-l moved into

positive territory in H1 of 2009/10. See the Tobacco Manufacturers Association

(www.the-tma.org.uk) for data on declines in smoking, cigarette consumption etc.

The market size

With revenues of £2.5bn p.a. from cash and carry collect, Booker holds a market

share of circa 26% and is the dominant player. It punches more lightly though in

food service/catering wholesale given its £0.93bn catering sales in 2008/09 and

is a modest player still in delivered grocery wholesale given its 2008/09 revenues

of £0.68bn from cash & carry delivered + Direct business. In the food service area

hotel food purchases alone are estimated at £1bn p.a. by Mintel.

The increased catering business is having a margin enriching effect

Regular customer surveys are now a feature

Internet sales have grown markedly (off a low base) although Booker does not believe that this has boosted margins

Booker Direct sales have been upgraded in quality

25% of H1 2009/10 l-f-l sales growth was from new clients

Booker is the dominant player in UK cash and carry


9

Table 7: The UK market (£bn)

Splits 2005 2006 2008

Cash and carry 9.3 9.4 9.7

Delivered grocery wholesale 7.6 8.1 8.6

Food service/catering wholesale 6.5 6.6 6.7

Total UK grocery & foodservice wholesaling market 23.4 24.1 25.0

Source: 2008 data was based on an IGD report published in April 2009 and included within the June 2009 Admission to the Official List document. 2005 and 2006

data, also IGGD sourced, was included in the May 2007 Blueheath Holdings/Booker transaction circular.

Competition

We have included abbreviated summaries of key rivals within the Appendices.

The market is both highly competitive and very fragmented.

Recent expansion into India

Booker disclosed in April 2009 that it had secured a site for a cash and carry

outlet in Mumbai. The logic was conceded as limited but in the UK Booker

supplies 4,100 Indian restaurants plus thousands of Indian owned businesses. A

Booker team spent 1+ year assessing the market opportunity and decided that

Mumbai (population 20m with 0.4m+ target customers) was ideal for store No.1.

The new facility, developed at a cost of £1m, opened on the 26th of September

2009 with losses of £1m absorbed in the H1 2009/10 p&l. Mumbai looks much

like any other Booker outlet, although the range of products stocked inevitably

diverges (more pulses etc with no alcohol sold as a license is not held). Initial

visitor levels have been favourable, whilst there is a good range of local suppliers

(a major reason why Mumbai was chosen). Future expansion in India may be

conducted using a partner to aid planning and - over time - there may be scope to

grow the Direct operations in India too*. Management is of the view too that

Mumbai alone could sustain 10 cash and carry branches which would generate

purchasing economies – 1 branch only would be a management distraction. *Routes

to market for products are complex in India and in general there is not currently a wholesaler channel.

Financials

Booker has generation cash strongly in recent years notwithstanding its slender

gross and EBIT margins. 5 financial points warrant mention:

1) The p&l tax charge will remain at modest levels (c 17%) out to the end of

2010/11 as Booker continues to utilise tax assets not recognised in prior

years, trading losses from Blueheath etc. Last year a tax offset of £4.0m

was secured in respect of former overseas businesses – the key reason

why the effective rate was only 16.9%. Blueheath was accompanied by

£30m of tax losses. A progressive rise to 28% will be seen over several

years after 2010/11, i.e. there will not be an immediate surge.

2) Working capital ratios have been tightly controlled in recent years.

Booker’s overall ratio for working capital of 1.9% of sales is unusually

low, albeit aided by the cash payments made by many cash & carry

customers. Capex needs are similarly very modest – just 0.4% of sales in

2008/09.

3) In 2008/09 the pre and post tax returns on average net assets were

18.2% and 11.5% respectively. This, in conjunction with low tax payments

and modest capital and working capital needs, is why Booker has been so

cash generative. Respective annualised returns were 30.4% and 19.1% in

The market is highly competitive and fragmented

Management concede the logic of this move was limited but there is a large Indian business element in the UK

Strong cash generation

The p&l tax charge will remain modest near term

Working capital and capex needs are very modest

Whilst pre and post tax returns on average net assets are good


10

H1 of 2009/10, although Booker’s results are slightly H1 loaded* (in

2008/09 47.1% of sales were recorded in the H1 period but 52.8% of

EBIT was earned then). * Booker has 13 trading periods of 4 weeks so in H1 (when there

are 6) 6/13 of annual overheads are accrued. Revenues are best in Spring/Summer when

consumers are eating out more, taking holidays which include meals out etc but H2 includes the

Christmas boost plus over-riders have a slight impact then as little is accrued here in H1. 4) As of 12th June 2009, the terms of the interest rate swaps were amended

although its coupon remained at 4.98% p.a. The quantum of the swaps

was cut from £130m to £50m and will fall further to £40m as of this

March (when part expires) and to zero in March of 2011 (when the

residue expires). There was a cash cost of £7.2m for the early termination

fee to cut this liability, including £0.7m of accrued interest, plus £2.0m

of tax will be recouped limiting the true net cost to £5.2m. Booker’s

interest costs will decline further as the swaps expire.

5) In 2008/09 £31.2m worth of guarantees* were provided by Booker’s

banks for some of its suppliers (e.g. Gallaher and Imperial Tobacco) and

insurers. These were covered via the group’s revolving credit facility

(RCF**). The peak RCF drawdown during 2008/09 was £72.5m which,

after allowance for the guarantees cited, left headroom of £42.3m given

its size of £146m. The RCF was £161m previously but was cut in

December 2008 when revised facilities were obtained (Kaupthing was

replaced then by Barclays). Aside from the RCF - supplied by HBOS and

Barclays and available to June 2012 - a £50m bank loan facility is also

available from these parties***. * The guarantees mentioned were £64m for Gallaher

and Imperial Tobacco alone back in 2005 so they have been cut by 51%+ since. **The bank loan

facility is costing LIBOR + 2.0-2.5% p.a. and the RCF costs LIBOR + 2.5-2.75% + a non-utilisation

fee of 1.25-1.375% on the amount not drawn. *** At any given point in the year Booker can utilise

its cash in hand, the senior debt of £50m and the RCF. The optimal time of the year is

Spring/Summer when cash and carry sales – generally paid in cash - are strongest. The worst

time is the end of the calendar year & January when c £70m can be drawn under the RCF due to:

higher stock levels pre Xmas; tax & lease payments due in Jan; and slacker Jan trading levels.

Current trading

H1 results

Table 8: Key numbers and trends for H1 2009/10

Revenue

growth

7.7% actual and l-f-l. Comprised volume growth of 5%, price of 1.5%-2% and a modest mix plus. Pricing plus lower vs previously.

C £1bn of reported sales of £1.61bn non-tobacco products. Also disclosed caterers’ sales ahead by £100m in the last year.

GP & GM ros 12.9% ahead at the gross profit level with the gross margin 16 bps higher at 3.52%.

EBIT & EBIT

margin

13.1% ahead at £34.5m with the margin 10 bps ahead at 2.14%. EBIT included £1.1m* of property profits in H1 of 08/09 vs

£0.8m** of listing fees in H1 09/10 so underlying growth was 20%. Allowing too for Indian losses, underlying growth was 23.5%.

PBT 12.1% ahead at £29.7m, despite the £1m Indian loss absorbed.

Tax 16.8% based on the expected rate of 17% for the year. To stay at 17-18% to end 2010/11.

Business

trends

Saw improved customer satisfaction ref choice, price & service. In-stock ratio 98.4% vs 96%, although in-stock %'s for Mondays

need upgrading. Happy 173 outlets, 3 RDC's & 1 NDC (as Direct business increases can undertake more via the branches). Macro

circumstances tough in H1 for customers with pub closures rising but Booker’s net churn rate no worse vs 2 years earlier, with

business gained from rivals (Brakes and 3663). Beers & wines toughest, reflecting some product sales by some parties ex duties.

Diluted EPS 10.2% ahead

Net debt £20.9m lower at only £4.0m at 11th September 2009, aided by a £18.4m working capital inflow. Indicated could be in the teens at

the financial year end though as some of the H1 working capital benefits enjoyed may unwind.

Outlook "Booker continues to trade in line with management expectations". Influenced the 20% higher H1 dividend of 0.24p per share.

Full year losses India to be no worse than in H1, with no one offs expected in H2.

Source: FinnCap based on the 13th October analysts’ briefing. *Included in admin costs so the £2.5m rise in these was less in reality. ** Included too in admin costs

Interest rate swaps were cut by 61.5% last June and will disappear as of March 2011

Bank guarantees are covered under the group’s revolving credit facility


11

The Q3 trading update

L-f-l sales below include Q3 2009/10 results recently reported. Q4 of last year

saw marked non-tobacco progress so comparatives will be harder, especially as

travel issues could have some knock-on. The Q3 update indicated that customer

numbers and average spend per customer continued to improve reflecting

Booker’s improved choice, price and service. Fresh departments were especially

good (fruit & veg sales +59% aided by good potato sales and meat +20%). The

tobacco number reflected consumers purchasing more UK duty paid tobacco plus

share gains*. Profits and net debt were “in line with management expectations”.

In India, customer numbers and spend levels were “good” with increased

confidence that Booker “can serve the Kirana** stores, street traders, caterers

and suppliers of India”. For the YTD (the first 40 weeks) and ignoring seasonality

issues (actual revenues for Q1 & Q3 are not disclosed) l-f-l sales growth will have

averaged 7.3% per week***. *Booker does not actively promote tobacco products which are low

margin but they require modest shelf space and are cash positive. Sales of tobacco products in the UK have

improved of late due to the effects of: lower interest rates; fewer consumers going abroad and purchasing

products overseas; the HMRC clamp down on smuggled products; and, possibly, more smoking due to the

recession. ** Kirana stores are owned and operated on a small scale, usually 500 sq ft or less. *** Despite the

Q3 l-f-l Booker are maintaining a cautious stance as consumers are becoming increasingly aware of how

they may be squeezed irrespective of which political party is in power after May 6th.

Table 9: Recent l-f-l sales data

Q1 08/09

(14 weeks to

4/7/08)

H1 08/09

(24 wks to

12/9/08)

Q3 08/09

(16 weeks to

2/1/09)

Q4 08/09

(12 weeks to

27/3/09)

Yr 08/09

(52 wks to

27/3/09)

Q1 09/10 (12

weeks to

19/6/09

Q2 09/10

(12 weeks to

11/9/09)

H1 09/10

(24 wks to

11/9/09)

Q3 09/10

(16 weeks to

1/1/10)

Total l-f-l n/a 1.1 2.7 6.4 2.6 7.8 7.6 7.7 6.7

Non-tobacco l-f-l 3.3 4.1 5.0 10.2 5.7 10.4 8.5 9.4 6.0

Tobacco l-f-l -4.3 -3.2 -0.9 1.2 -1.5 3.9 6.2 5.1 7.9

Caterers l-f-l n/a 4.7 n/a n/a 7.0 n/a n/a 12.6 n/a

Retailers l-f-l n/a -0.5 n/a n/a 1.0 n/a n/a 5.5 n/a

Source: FinnCap based on past Booker press releases.

Issues

Retirement benefits (see data table in Appendices)

At the end of the H1 2009/10 period the pension deficit of £32.2m represented

only 12.7% of net assets (see Appendices). An outturn aided by a high take up of

an offer made in December 2006 to deferred members to leave the Scheme

(2,700+ transferred out) plus the £10m* p.a. payment out to March 2016 that

Booker agreed with the pension trustees following the March 2007 triennial

valuation. The latter determined a £89m funding need and it is this that the

£10m p.a. contributions cited are addressing. The next triennial valuation is on

31st March 2010. * The £10m was £11m in the 2008/09 cash flow due to administration costs.

Lease costs

An aggregate £46.9m in 2008/09 with 85.5% paid for land & buildings. Booker

leases all of its trading properties under operating leases which are typically of 5-

20 years duration. Many resulted from a sale and leaseback deal covering 52

properties entered into in 2005. Note 25 to last year’s accounts detailing lease

costs disclosed that future minimum lease payments under non-cancellable

operating leases aggregated £654.7m at end March 2009 split thus: £46.9m

within 1 year; £181.7m within 2-5 years; and £426.1m due after 5 years. The

Recent Q3 l-f-l numbers were excellent, surprisingly so for tobacco products

Booker is paying £10m p.a. out until 2015/16 to cut its deficit

Lease costs – largely for land & buildings - are significant and note too that most of Booker’s provisions relate to properties


12

£654.7m total was pre a small offset via minimum operating sublease receipts

totalling £9.4m. Rental costs for the 3 RDC’s and the NDC are running at circa

£7.6m p.a. Most of Booker’s provisions (£39.7m at 27th March 2009) relate to

properties, including vacant ones or those sublet for less than the head lease.

Trends for convenience stores

“The growth of the UK food multiples and discounters has resulted in a decline

in the number of small independent retailers and in the value of sales made

through such retailers…consumers have been attracted to the brand offerings

and value offered………In addition, the major food multiples have now moved

into the convenience market, launching smaller store formats which compete

directly with the smaller retailers”.

P10 of the June 2009 Prospectus issued for Booker’s move to the Official List

highlighted this risk. It appears exaggerated: IGD Research on c-stores indicated

that whilst numbers have been contracting, revenue growth has still featured (see

Appendices). A c-store is defined as being sub 3,000 sq ft and stocking at least 7

of certain key product categories (alcohol, bakery, chilled food, confectionery, fast

food, fruit/vegetables, health & beauty household/non-food, lottery, milk,

newspapers/magazines, packaged groceries, snacks, soft drinks and tobacco).

Tesco has been most aggressive in c-store development, purchasing T&S Stores in

late 2002 which owned 862 operating under the One Stop and Day & Nite fascias.

This aided the roll-out of Tesco Express stores (then only 100+ in number) with

many of the T&S Stores c-stores converted subsequently to Tesco Express outlets.

At 29/8/09 Tesco had 1,524 stores in the 0-3,000 sq ft size aggregating 3.0m sq ft

or 9.4% of its UK sq footage total, versus 1,458, 2.8m sq ft and 8.9% respectively

at 28th February 2009. One Stop shops at end August 2009 numbered 512 and

Express outlets 1,027 (sources: www.tescoplc.com).

Booker’s medium & longer term strategy

The pursuit of the current ‘Broaden’ improvement programme the development

of National Accounts and expansion in India are all-important. These aims are

regarded by management as the cheapest and lowest risk expansion options. Top

line boosts should also generate valuable operational gearing benefits*. 173 cash

& carry branches is considered adequate for nationwide UK coverage, whilst it is

felt that 50% more trade could be conducted via these. * There could be some

logic to a consolidation move in the UK to boost sales via existing branches and/or grow the Booker Direct

business. However, the price would need to be outstanding since unlike organic growth acquisitions lead to

the inheritance of long leasehold properties, vehicles, possible pension issues, large debts etc when all Booker

really wants is the extra customers. By growing organically, the equivalent of a reasonably sized rival can be

added p.a. There is no desire to expand into Europe as the market is viewed as saturated and well-developed.

Forecasts

These are detailed overleaf. L-f-l sales growth of 8% for tobacco and 4% for non-

tobacco has been assumed for Q4 09/10 to give a composite 5.5% for Q4 and

hence 6.9% for the year overall. We have assumed 4% l-f-l for 2010/11 (a case

then of growth off a higher starting base) split as to 5.3% for non-tobacco

products and 1.5% for tobacco products. A gross margin rise of 6 bps has been

projected for 2009/10 and 8 bps for next year when the impact of non-tobacco

products comes through more fully. Internet-based sales should continue to grow

and could comprise 12.5% of Booker’s revenues in 2009/10, rising to c 15% next

year.

Tesco has been the most aggressive grocery major in c-store development

This is low risk, involving ‘more of the same’ and acquisitions will only be pursued if an exceptional value case exists

Internet-derived sales could grow to 15% in 2010/11


13

Table 10: P&L record and forecasts (£m)

H1

2006/07

H2

2006/07

Yr

2006/07

H1

07/08R

H2

2007/08

Yr

2007/08

H1

2008/09

H2

2008/09

Yr

2008/09

H1

2009/10

H2

09/10E

Yr

09/10E

Yr

2010/11E

Sales 1,430.3 1,579.5 3,009.8 1,465.4 1,612.8 3,078.2 1,496.9 1,682.3 3,179.2 1,612.6 1,786.0 3,398.6 3,534.5

Cost of sales -1,393.7 -1,534.4 -2,928.1 -1,421.0 -1,566.1 -2,987.1 -1,446.6 -1,630.4 -3,077.0 -1,555.8 -1,727.8 -3,283.6 -3,412.2

Gross profit 36.6 45.1 81.7 44.4 46.7 91.1 50.3 51.9 102.2 56.8 58.2 115.0 122.3

Gross margin (%) 2.56 2.86 2.71 3.03 2.90 2.96 3.36 3.09 3.32 3.52 3.26 3.38 3.46

Admin costs -16.2 -29.8 -46.0 -20.3 -24.7 -45.0 -19.8 -24.6 -44.4 -22.3 -27.2 -49.5 -51.8

EBIT 20.4 15.3 35.7 24.1 22.0 46.1 30.5 27.3 57.8 34.5 31.0 65.5 70.5

EBIT margin (%) 1.43 0.97 1.19 1.64 1.36 1.50 2.04 1.62 1.82 2.14 1.74 1.93 2.00

Net finance income -4.1 -3.1 -7.2 -3.5 -6.4 -9.9 -4.0 -6.6 -10.6 -4.8 -5.7 -10.5 -10.0

PBT 16.3 12.2 28.5 20.6 15.6 36.2 26.5 20.7 47.2 29.7 25.3 55.0 60.5

Tax -4.1 -11.7 -15.8 -3.8 -2.6 -6.4 -4.5 -3.5 -8.0 -5.0 -4.4 -9.4 -10.3

Tax (%) 25.2 95.9 55.4 18.4 16.7 17.7 17.0 16.9 16.9 16.8 17.4 17.1 17.0

Net income 12.2 0.5 12.7 16.8 13.0 29.8 22.0 17.2 39.2 24.7 20.9 45.6 50.2

Av basic equity (m) 1,343.8 1,342.8 1,344.3 1,432.8 1,492.8 1,462.8 1,488.4 1,488.4 1,488.4 1,491.5 1,491.5 1,491.5 1,491.5

Av f. dil equity (m) 1,343.8 1,342.8 1,344.3 1,436.4 1,498.6 1,467.5 1,492.9 1,492.6 1,492.6 1,527.3 1,527.3 1,527.3 1,527.3

EPS basic (p) 0.91 0.03 0.94 1.17 0.87 2.04 1.48 1.15 2.63 1.66 1.40 3.06 3.37

EPS diluted (p) 0.91 0.03 0.94 1.17 0.86 2.03 1.47 1.16 2.63 1.62 1.37 2.99 3.29

DPS declared (p) 0.0 0.0 0.0 0.0 0.5375 0.5375 0.20 0.67 0.87 0.24 0.76 1.00 1.10

Depreciation 8.1 9.3 17.4 7.7 8.5 16.2 6.7 8.0 14.7 6.5 8.3 14.8 15.5

EBITDA 28.5 24.6 53.1 31.8 30.5 62.3 37.2 35.3 72.5 41.0 39.3 80.3 86.0

EBITDA margin (%) 1.99 1.56 1.76 2.17 1.89 2.02 2.49 2.10 2.28 2.54 2.20 2.36 2.43

Exceptionals -0.8 -1.0 -1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

‘Dirty’ PBT 15.5 11.2 26.7 n/r n/r n/r n/r n/r n/r n/r n/r n/r n/r

Dirty' basic EPS (p) 0.85 -0.04 0.81 n/r n/r n/r n/r n/r n/r n/r n/r n/r n/r

Expected return

pension assets

2.8 2.7 5.5 2.4 1.2 3.6 1.0 1.1 2.1 0.5 0.5 1.0 1.0

Interest receivable 0.7 0.9 1.6 0.0 0.0 0.0 0.0 0.4 0.4 0.0 0.0 0.0 0.0

Net gain int swap 1.4 2.2 3.6 0.0 0.2 0.2 0.2 -0.2 0.0 0.0 0.0 0.0 0.0

Discount debt

buyback

0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.8 4.8 0.0 0.0 0.0 0.0

Sub-t f. income 4.9 7.3 10.7 2.4 1.4 3.8 1.2 6.1 7.3 0.5 0.5 1.0 1.0

Interest bank loans -6.7 -5.9 -12.6 -3.9 -5.5 -9.4 -3.2 -4.0 -7.2 -3.5 -3.1 -6.6 -6.1

Net loss int swap 0.0 0.0 0.0 -0.1 0.1 0.0 0.0 -5.1 -5.1 0.0 0.0 0.0 0.0

Other interest -0.1 -0.3 -0.4 0.0 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Unwinding discount

on provisions

-1.3 -1.3 -2.6 -1.1 -1.4 -2.5 -1.2 -1.5 -2.7 -1.0 -1.0 -2.0 -2.0

Amortisation of

financing costs

-0.9 -1.4 -2.3 -0.8 -0.9 -1.7 -0.8 -2.1 -2.9 -0.8 -2.1 -2.9 -2.9

Sub-total f. costs -9.0 -8.9 -17.9 -5.9 -7.8 -13.7 -5.2 -12.7 -17.9 -5.3 -6.2 -11.5 -11.0

Net finance costs -4.1 -3.1 -7.2 -3.5 -6.4 -9.9 -4.0 -6.6 -10.6 -4.8 -5.7 -10.5 -10.0

Net cash int costs -6.1 -5.3 -11.4 -3.9 -5.6 -9.5 -3.2 -3.6 -6.8 -3.5 -3.1 -6.6 -6.1

Source: FinnCap. All IFRS basis. 07/08 numbers included 43 weeks Blueheath worth £78.8m to sales (vs £98.2m if in all year).

Cash flow estimates are detailed below:


14

Table 11: Cash flow record and forecasts (£m)

Yr

2006/07

H1

2007/08

H2

2007/08

Yr

2007/08

H1

2008/09

H2

2008/09

Yr

2008/09

H1

2009/10

H2

2009/10E

Yr

2009/10E

Yr

2010/11E

EBIT 35.7 24.1 22.0 46.1 30.5 27.3 57.8 34.5 31.0 65.5 70.5

Depreciation 17.4 7.7 8.5 16.2 6.7 8.0 14.7 6.5 8.3 14.8 15.5

Profit sale property, plant etc 0.0 0.0 0.0 0.0 -0.7 0.5 -0.2 0.0 0.0 0.0 0.0

Share based payments 0.0 0.0 0.0 0.0 0.4 1.0 1.4 0.6 1.2 1.8 2.0

Working capital 26.6 18.5 -6.6 11.9 5.7 -8.4 -2.7 18.4 -23.4 -5.0 -5.0

Change in provisions -3.5 -1.4 -1.3 -2.7 -2.0 -3.4 -5.4 -1.1 -1.9 -3.0 -3.0

Contributions pensions -8.3 0.0 -9.7 -9.7 -5.5 -5.5 -11.0 -5.5 -5.5 -11.0 -11.0

Net cash flow ops 67.9 48.9 12.9 61.8 35.1 19.5 54.6 53.4 9.7 63.1 69.0

Net interest paid -7.5 -5.5 -3.7 -9.2 -4.9 -3.4 -8.3 -3.3 -3.3 -6.6 -6.1

Tax paid -0.1 0.0 0.0 0.0 0.0 -2.4 -2.4 -3.6 -5.8 -9.4 -10.3

Capex -6.0 -2.0 -9.0 -11.0 -4.0 -9.9 -13.9 -7.7 -8.7 -16.4 -18.0

Sale of property, plant etc 0.0 0.0 0.4 0.4 0.9 0.5 1.4 0.0 0.5 0.5 0.5

Acquisition 0.0 -11.0 0.0 -11.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Dividends 0.0 0.0 0.0 0.0 -8.0 -3.0 -11.0 -10.0 -3.6 -13.6 -15.2

Part settlement interest swap 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -7.2 0.0 -7.2 0.0

Issue of shares 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0

Other items -5.8 -0.8 -0.9 -1.7 -0.8 2.7 1.9 -0.8 0.2 -0.6 -1.0

Overall flow 48.5 29.6 -0.3 29.3 18.3 4.0 22.3 20.9 -11.0 9.9 18.9

Opening net cash/(debt) -125.0 -76.5 -46.9 -76.5 -47.2 -28.9 -47.2 -24.9 -4.0 -24.9 -15.0

Closing net cash/(debt) -76.5 -46.9 -47.2 -47.2 -28.9 -24.9 -24.9 -4.0 -15.0 -15.0 3.9

Source: FinnCap

Appendices

Chart 1: Extra branch outlets

1

20

3445

7181

95

0102030405060708090

100

Jan-06

14/09/2007

28/03/2008

12/09/2008

May-09

11/09/2009

31/03/2010F

Source: FinnCap based on past Booker disclosures


15

Table 12: Booker’s more competitive pricing based on the published list price of a basket of goods

2004/05 2005/06 2006/07 2007/08 2008/09

Booker's catering products 3.5 1.0 -1.9 -2.4 -2.2

Booker's retail products 3.0 0.5 -2.3 -2.1 -1.4

Source: Booker analysts’ briefing of 28th May 2009. The work was undertaken by IRI Research. Shows the degree of Booker’s under/over-pricing vs a basket of goods.

Chart 2: The growth in Booker’s Internet-based sales

44.033.9

109.096.0

250.0

180.8

1.52.3

3.5

6.4

7.9

11.2

20.0

70.0

120.0

170.0

220.0

270.0

2006

/07

Yr

H1

2007/

08

2007

/08

Yr

H1

2008/

09

2008

/09

Yr

H1

2009/

10

0

2

4

6

8

10

12

Internet sales (£m) % sales

Source: Booker disclosures. Internet sales were running at c £15m in 2005/06. The £109m in 2007/08 included £17m added via Blueheath (included for 43 weeks).

Table 13: Working capital numbers/ratios

Stocks Trade receivables

net of doubtful

debts

Prepayments &

accrued income

Total for trade &

other receivables

Trade payables Total

2006/07 (£m) 176.2 23.6 31.4 55.0 -287.8 -56.6

2007/08 (£m) 184.7 27.9 26.4 54.3 -297.8 -58.8

2008/09 (£m) 196.8 28.9 34.7 63.6 -321.1 -60.7

2006/07 as % sales 5.9 0.8 1.0 1.8 9.6 1.9

2007/08 as % sales 6.0 0.9 0.9 1.8 9.7 1.9

2008/09 as % sales 6.2 0.9 1.1 2.0 10.1 1.9

2006/07 days ratio 21.4 2.9 3.8 6.7 34.9 6.9

2007/08 days ratio 21.9 3.3 3.1 6.4 35.3 7.0

2008/09 days ratio 22.6 3.3 4.0 7.3 36.9 7.0

Source: FinnCap and Booker Accounts. Note that the cash & carry side has a positive working capital profile as Booker is typically paid for its sales of stocks – almost

totally in cash – before it has to pay its own suppliers. By contrast, the Direct business involves offering 4-6 week credit terms to customers so this business is working

capital consuming. As the Direct business is (carefully) grown, Booker overall will be funding modest annual working capital needs.


16

Table 14: Booker Direct clients (National Accounts) (National Accounts)

Area Clients Comments

Leisure customers Apollo Cinemas, National Amusements UK, Odeon

Cinemas, Reel, Storm Cinemas and Vue.

Booker is now No.1 supplier of food and drink products to

the UK cinema industry

Public sector NHS, NAAFI, NOMS (National Offender Management Services) The prison supply contract where DHL undertakes logistics

Solutions Charles Wells, Henderson Group, M&S, Nicolas, Park,

Peppermint Events, Pepsico, Robinsons, Sarova Hotels,

S&N Pub Enterprises, Supreme, The Hain Celestial Group

E.g. Booker Direct works with PepsiCo to aid its deliveries to

customers

Source: 13th Oct 09 analysts’ briefing. According to National Statistics in 2008 the public sector spent £2.2bn on food & drink equating to 2.4bn meals

Table 15: Staff numbers and costs

2006/07 2007/08 2008/09

Branch & distribution 7,778 7,779 7,750

Administration 567 634 590

Total for average staff numbers 8,345 8,413 8,340

Wages & salaries 123.4 125.2 129.3

Social security costs 11.1 11.0 11.6

Share based payments 0.0 0.0 1.4

Other pension costs 3.1 3.0 3.1

Total staff costs (£m) 137.6 139.2 145.4

Total costs/sales (%) 4.6 4.5 4.6

Source: FinnCap based on Booker Accounts. Total costs (cost of sales + admin expenses) were £3,121.4m in 2008/09 so aggregate staff costs comprised 4.7% of this.

Table 16: A customer survey example for Booker

Factor Score Jan 2009 Change % versus Jan 2007

Branch Helpful staff 90.3 10.3

Speed of service 73.0 7.8

Availability 66.6 8.8

Delivery Driver 92.6 4.0

Punctuality 75.6 1.7

Accuracy of delivery 68.5 7.5

Overall Range 80.2 4.4

Recommend to a friend 83.9 7.3

Source: Slide 9 of the group’s 28th May 2009 analysts’ briefing. Based on an independent telephone survey of 8,700 customers undertaken at the dates indicated. The

survey is conducted 4x p.a. for every branch and every product category.

Table 17: Major shareholders (%)

Booker employees 14.00 Schroder Plc 6.31

Artemis Investment Management Ltd 9.97 AXA SA 5.40

Aviva Plc 8.93 Other Directors/Officers 3.31

Charles Wilson 8.28 Cazenove Capital Management Ltd 3.26

Lansdowne Partners Ltd 7.68 F&C Asset Management 3.12

Source: Fidessa as of 8/1/2010.


17

Table 18: Leading symbol groups in the UK

Retailer Number of stores Retailer Number of stores

Best In/Best One (Bestway) 1,900 P&H Retail: Mace 214

Costcutter 1,600 P&H Retail: Mace Express 272

Lifestyle/Lifestyle Express/Scandia (Landmark) 1,760 P&H Retail: Supershop 124

Musgrave Group: Londis 1,861 P&H Retail: Your Store 55

Musgrave Group: Budgens/Budgens Local 96 P&H Retail: Keystore 57

Nisa Today’s: Nisa 550 Premier (Booker) 2,250

Nisa Today’s: Day Today’s 650 Spar UK 2,557

Nisa Today’s: Today's 55

Source: IGD report of 4th August 2009 – see www.igp.com. We have included fewer symbol groups above: IGD also includes for instance WH Smith (Motto, Welcome

Break and Roadchef) data. IGD’s definition of symbol groups includes ‘franchise’ and ‘fascia groups’. NB, TNS Worldpanel published data on 11/1/10 showing

independents having 2.1% of the GB grocery spend in the 12 weeks to 27/112/09 (vs 2.3%) with symbols accounting for 0.7% of this (vs 0.8%).

Table 19: Recent pension liabilities data (£m)

At 31/3/05 At 31/3/06 At 30/3/07 At 28/3/08 At 27/3/09 At 11/9/09

Retirement benefit assets 0.0 0.0 0.0 9.8 0.0 0.0

Retirement benefit liabilities -135.2 -84.6 -27.3 0.0 -2.0 -32.2

Total as per balance sheet -135.2 -84.6 -27.3 9.8 -2.0 -32.2

Equities n/a n/a 272.9 197.1 170.6 n/a

Corporate bonds n/a n/a 315.9 315.2 265.0 n/a

Other n/a n/a 31.0 4.5 2.2 n/a

Total fair value for Scheme assets 544.1 626.9 619.8 516.8 437.8 512.7

Present value of Scheme liabilities -679.3 -711.5 -647.1 -507.0 -439.8 -544.9

(Deficit)/Surplus in the Scheme -135.2 -84.6 -27.3 9.8 -2.0 -32.2

Equities (%) n/a n/a 44.0 38.1 39.0 n/a

Corporate bonds (%) n/a n/a 51.0 61.0 60.5 n/a

Other (%) n/a n/a 5.0 0.9 0.5 n/a

Total for Scheme assets (%) 100.0 100.0 100.0 100.0 100.0 100.0

Source: FinnCap based on past Booker Accounts etc. NB: 1) The Booker Group Pension Scheme (a Direct Benefits version) closed to new entrants in October 2001; 2)

A revised investment strategy (50% equities and 50% corporate bonds) is being implemented in 2009/10.


18

Table 20: C-store numbers and revenue splits

Stores

2009

% stores D % vs

2008

Sales 2009

(£m)

%

sales

D % vs

2008

Comments on trends

Co-operatives 2,416 4.8 0.3 3,300 11.3 7.9 Store numbers little changed but to be boosted by the Co-op's

takeover of Somerfield which will add 700+ net of divestments

Forecourts 8,641 17.1 0.1 4,105 14.1 5.1 Site closures have eased, with modern convenience formats growing

Multiples 2,812 5.6 8.0 4,338 14.9 12.7 Supermarket retailers now operate 1,713 dedicated c-stores (over half

of the segment) with high performing fresh food led store formats

Symbols 14,630 29.0 2.0 10,430 35.9 7.7 Numbers growing rapidly with almost 300 recruited in 2009 – growth

largely driven by wholesalers seeking to increase volumes via. Growth

scope exists as fresh food and sandwich offerings are expanded.

Non-affiliated

independents

21,950 43.5 -5.0 6,911 23.8 -0.2 Some of the numbers decline represents transfers across to symbol

groups but also exits by weaker stores.

Total

convenience

50,449 100.0 -1.3 29,084 100.0 6.1 Value total = 20.5% UK food & grocery market. Value growth reflects:

lifestyle & demographic factors; improved store formats; increased

provision fresh foods & food-to-go; keener prices. With more women

at work, a rise in single person households & increased consumption

of food-to-go, UK convenience market to be worth £39.7bn+ by 2014.

Joint ventures 1,698 8.8 n/a

Total ex j/v's 48,751 -1.6 29,084 6.1 Ex convenience multiples stores -2.1% but revenues +5.0%.

Source: FinnCap based on IGD Research reports – see www.igd.com. The IGD report was issued on 2/5/09 so presumably it related to the year to 31st March 2009

Some of Booker’s rivals

Bestway Cash & Carry (www.bestway.co.uk)

A private company. Acquired Batley’s in 2005. Based Park Royal, London. Bestway opened a £6m

redeveloped/enlarged central distribution warehouse at Coventry in Nov 2009 with c 250,000 sq ft; use

to supply 52 Bestway and Batley’s depots England, Scotland & Wales. 1,500+ independent retailers sell

its ‘Best-in’ product lines using the ‘Best-in’ shop fascia. Own label wines and pound lines added and

has 30,000 product lines. UK sales yr to end June 2009 rose by 5% to £1.92bn, PBT by 17% to £39.9m.

Brake Brothers (www.brake.co.uk)

Ashford HQ’ed concern delivering nationally fresh, frozen, ambient & non-food products. Deliver 6

days/week, usually next day. Products often designed exclusively for foodservice companies and offer

value. Own label brands (including Healthier Choices and Premiere collections) plus selected brands

are provided. Special monthly promotions feature. For caterers Brakes is synonymous with quality +

value, whilst 800+ non-food products cover all front/back of house needs. Clients include: business &

industry; educational establishments; event catering; healthcare; hotels; restaurants; & travel & leisure

operators. Online ordering possible. Via Pauleys fresh produce is provided, including exotic fruit.

Costco (www.costco.co.uk)

Cash & carry membership-based warehouses selling branded and own label goods. 21 UK outlets.

Makro Cash & Carry UK (www.makro.co.uk)

30 cash & carry outlets serving major cities: sales £1bn+, HQ Manchester. Part Metro Group

(www.metrogroup.de), the Dusseldorf retailer with 2008 sales of €33.1bn. Makro UK stocks 25,000

products with 400+ promotions/fortnight, whilst food & pack sizes are targeted at hotels, catering

businesses, trade & commercial needs. 1,000+ suppliers: both food and non-food items are stocked. Is

to launch 2 own label ranges (Aro in Jan 2010 & Fine Food in 2011) to take on Booker’s Euro shopper.

Matthew Clark (www.matthewclark.co.uk)

No.1 distributor wine for the on-trade, servicing all major UK regions; offers timed next day delivery

slots plus emergency deliveries. A j/v between Constellation Brands and Punch Taverns. Supplies

20,000+ outlets. HQ Bristol. Has 10 major distribution centres plus Forth Wines based in Scotland.


19

Musgrave (www.musgravegroup.com)

Private concern; sales €4.8bn. Partners food retailers and foodservice professionals in Ireland, the UK

& Spain, with HQ Cork. ‘One stop shop’ offered including: chilled & frozen goods; grocery lines;

alcohol; & non-food lines. 9 retail brands associated with; provides marketing/store development

support etc for retail partners who benefit from deals negotiated with suppliers. Brands are associated

with good deals by consumers. Budgens operates convenience stores through to large supermarkets

with Musgrave owning the brand since 2002. The Londis brand has been owned since 2004 and now

has 1,800+ independently owned members. In the UK has invested heavily to improve national supply

chain & product availability. In Ireland regards itself as the most innovative cash & carry wholesaler.

Nisa-Today’s (www.nisa-todays.com)

A mutual organisation HQ’ed Scunthorpe: provides benefits members so compete better vs

supermarkets. Ambient, chilled, fresh & frozen products supplied UK. Sales £1.2bn+ p.a. with

operations too ROI & Channel Islands. Members include Costcutter and Tuffins & Mills stores; former

comprises 1,600+ stores operated under a franchise system. Retail members belong to ‘Nisa’ and

wholesale members to ‘Today’s’, with 670+ Nisa retailer members operating 5,000+ stores and 240

Today’s wholesale companies with 270 depots. Members can use these names for store fascias (there

are 450 Nisa-branded retail stores and 50+ Today’s-branded stores) to benefit from recognised

imagery, standardised lay-outs etc. Has distribution centres for fresh & frozen products Harlow and

Stoke-on-Trent + a 625,000 sq ft £30m Scunthorpe facility opened 2005 stocking grocery & licensed

products. 12,000+ product lines delivered with Nisa members (all operate independent stores) enjoying

300+ product offers/week. Members gain rewards & rebates for loyalty and for adding extra volume.

Palmer & Harvey (www.palmerharvey.co.uk)

Nationwide distribution for independent c-stores, small multiples & larger customers (e.g. Esso, Shell

and large grocery multiples). Regular promotions, free delivery etc. 69,000+ product lines stocked. HQ

Hove, Sussex. Symbol concepts provided for all store types/sizes (e.g. Supershop for small CTN shops,

Mace Express for forecourts, Mace for full convenience outlets) with £’s assistance with shop fittings.

Recently offered 24 hour ordering for independent retailers via a new transactional web-site.

Spar (www.spar.co.uk)

A symbol group: allows independent members to enjoy collective buying & market power. 16,000 stores

34 countries with 2,600 UK where sales £2.7bn+ use 6 RDC’s providing 900 own brand lines. Retailers

benefit advice merchandising & marketing, promotion packages, store designs etc.

WaverleyTBS (www.waverleytbs.com)

UK’s largest independent drinks wholesaler - supplies 1 in 5 bottles sold in the on-trade via 20 depots.

3663 Foodservice (www.spiracle-3663.co.uk )

Sales £1bn+ p.a. Based High Wycombe. Customers include cafes & clubs, Government departments,

hospitals, pubs, restaurants & schools. Owned Bidvest Group (www.bidvest.com): JSE listed

multinational (2008/09 revenues R112.4bn). Bidvest Europe run from London had 2008/09 sales

R37.0bn (+9.8%) & EBIT R770m (-12.5%). 3663 underperformed necessitating “the closure and

reorganisation of certain operations”: 6 depots closed/roll-out IT system delayed. Bidvest acquired

Booker Foodservice 1999 and renamed 3663. Supplies frozen, fresh & chilled products from 1.84m sq ft

storage at 40 depots with 1,100 vehicles delivering to 50,000+ customers (include Burger King,

Compass & Prêt a Manager). 2,600+ frozen, 560 chilled, 200+ fresh meat & poultry products & 1,000+

non-food products which include wines, beers & spirits as well as cleaning chemicals, workwear etc (a

joint distribution service with Swithenbank Foods provides 330+ fresh fruit and vegetable lines).

Online ordering and next day delivery on a core range and branded & own label products supplied.

Service proposition = operates as a partner, not a mere supplier.

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The recommendation system used for this research is as follows. We expect the indicated target

price relative to the FT All Share Index to be achieved within 12 months of the date of this

publication. A ‘Hold’ indicates expected performance relative to this index of +/-10%, a ‘Buy’

indicates expected outperformance >10% and a ‘Sell’ indicates expected underperformance of

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