A downwards drift at food wholesaler Booker (BOK) should interest investors seeking an attractive cash-backed income stream. Though the cash and carry operator remains highly-rated at 19.5 times prospective earnings on a share price of 126.4p, its strong cash flows and growth prospects mean the premium is more than merited.

Booker is a wholesaler of groceries, alcoholic drinks and tobacco to caterers, small businesses and retailers. Despite testing market conditions, sales grew 17.3% to £4.7 billion in the year to March. Chief executive officer Charles Wilson is targeting £6 billion revenues over the next few years.

The £2.2 billion cap has scope for growth in the UK catering market, benefiting from the trend towards eating out that is hurting supermarkets, such as Tesco (TSCO). Specialist delivered businesses Booker Direct, Ritter Courivaud, Classic Drinks and Chef Direct are all making progress, whilst online and Indian expansion add to Booker’s growth attractions.

AGENDA Chart - Booker - Jul 2014

Although weak grocery market conditions aren’t helpful, the small stores to whom Booker supplies are proving to be more resilient than bigger grocers and Booker boasts growing exposure to the discount channel through its Family Shopperfascia.

A first quarter trading statement (9 Jul) revealed robust sales growth over the 12 weeks to 20 June. Group sales – including Makro which returned to profit for the first time in several years under Booker ownership – grew 3.8% with higher margin non-tobacco lines rising 5.4%. Stripping out Makro, Booker’s same-store sales of non-tobacco lines rose by a better-than-forecast 3.6%, while a drop in Makro’s non-tobacco like-for-likes reflected the deliberate exit from non-profitable lines in a move to improve earnings quality.

Booker ended its March 2014 financial year with £149.6 million of cash. This has helped fund a £61 million (3.5p) capital return, issuing ‘B’ shares that investors were able to redeem for cash. Booker intends to repeat the trick next year.

Shore Capital forecasts a near-18% rise in pre-tax profits to £139.8 million for 6.5p of earnings this financial year ahead of respective £158.6 million and 7.4p in the period to March 2016. Based on the broker’s combined dividend forecast of 7p for March 2015 – capital return plus normal dividend – and 7.4p estimate for next year, Booker offers a highly-attractive yield north of 5.5% supported by burgeoning free cash flow.

Issue Date: 30 Jul 2014