Category: Philosophy
An investment philosophy is a coherent way of thinking about markets, how they work to put into practice. It’s a set of core beliefs that you can go back in order to generate new strategies to make it work. The investment philosophy of Investor Desk begins from the perspective that our clients are seeking a relationship which focuses on their short- and long-term goals via the provision of a strategic wealth management plan, coupled with a transparent, flexible and nimble investment solution. Investor Desk embraces a holistic view of a client’s business and personal circumstances and seeks to meet their goals and objectives through best of breed technology and financial products, delivered via a client centric relationshipand service. In the absence of a well-considered strategic wealth management plan, we believe there is less capacity to define an appropriate level of portfolio risk. We believe that asset allocation, and genuine portfolio diversifications are the key drivers of portfolio risk, and that high transparency and liquidity are important for navigating volatile market conditions.
Investment Thesis
- Trading at a discount to our valuation, with attractive trading multiples and dividend yield.
- SUL’s four core segments have strong tailwinds/fundamentals. For example, vehicle aftermarket sales continue to be strong (with an increase in secondhand vehicles sold (Supercheap); travellers seeking social distancing and thus moving away from public transportation (Supercheap); with Covid lockdown measures in force, more people would spend their holidays domestically (BCF; macpac), utilising their vehicles (Supercheap); increasing awareness of fit and healthy living (Supercheap); (rebel).
- A strong capital position.
- Strong brands in BCF, Macppac, Rebel, and Supercheap, as well as solid industry positions in oligopolies and a solid store network.
- With over 8 million members, this is an appealing loyalty programme.
- Making the switch to an omni-channel business. Previously, the business was modelled on like-to-like store numbers; however, management now thinks of business metrics in terms of club members and has been capable of growing active club membership much faster than store numbers (store numbers in the last 5 years have grown +2 percent CAGR vs active club members at +10 percent CAGR), supplying an opportunity to expand customer base and thus (most of the customers are omni channel). Management continues to push for increased online sales (Covid-19 added to this tailwind), with online sales currently accounting for 13-15 percent of total sales and expected to rise to 20-25 percent over the next five years.
Key Risk
- Increasing competitive pressures.
- Any supply chain issues, particularly as a result of the impact of Covid-19 on logistics, that have an impact on earnings.
- Increasing cost pressures are eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
- A disappointing income update or failure to achieve the market’s expected growth rates could cause the stock price to re-rate significantly lower.
SUL’s Strong Balance Sheet
- Net cash position of $242.3 million, resulting from a July 2020 equity raise and strong trading throughout the period.
- Fixed charge cover is 3.1x (based on commonplace EBITDAL) and is anticipated to stabilise in the low to mid 2x range.
- SUL has $600 million in undrawn committed debt facilities.
- “While Covid-19-related trading restrictions and lockdowns continue, the Group intends to preserve a very commercially produced position,” said management.
- Once trading conditions have normalised, the Group intends to aim for a long-term net debt/EBITDA position (pre AASB 16) of 0 to 0.5x.”
Company Profile
Super Retail Group (SUL) is one of Australasia’s Top 10 retailers. SUL comprises four core segments. BCF: Australia’s largest outdoor retailer focused on selling Boating, Camping and Fishing products. Macpac: retailer of apparel and equipment with their own designs focused on outdoor adventurers. Rebel: Retailer of branded sporting and leisure goods and equipment for casual and serious fitness enthusiast. Supercheap Auto: specialty retail business which specialises in automotive parts and accessories.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment thesis
- Strong market share in Australia, with a strong influence in Asia. As a result, it offers appealing exposure to the growth of both developed and emerging markets.
- The corporation’s newly appointed CEO brings a fresh perspective on company strategy, which can restructure the company for strong volume growth.
- Based on our projections, the valuation is reasonable.
- Going forwards, management appears to be less centred on acquired growth, implying that the Company is less likely to make a value-destroying acquisition.
- The reintroduction of the dividend is a positive sign that management is optimistic about future earnings growth.
- In an environmentally friendly market, focusing on sustainable packaging.
Key Risks
The following are the key challenges to the investment thesis:
- Increased competitive pressures, resulting in further margin erosion.
- Cost pressures on inputs that the corporation would be unable to pass on to users.
- A worsening in Australia’s and Asia’s economic conditions.
- The risk of emerging markets.
- Poor acquisitions or failure to meet synergy targets as PGH shifts away from packaging for food, dairy, and beverage clients and towards more high-growth sectors such as healthcare.
- Negative currency movements (purchased raw materials in U.S. dollars)
Highlights of key FY21 results
- Revenue fell -3 percent to $1,762 million, while underlying EBITDA increased by 4% to $315 million, underlying EBIT increased by 10% to $183 million (EBIT margin increased by 120 basis points to 10.4 percent), and underlying NPAT increased by 28% to $94 million. The positive motivational drivers of group EBIT growth over the year were: margin improvement (+$10m) as a result of disciplined raw material input cost management; volume growth in Packaging & Sustainability (+$9m); and volume increase in Materials Handling & Pooling (+$15m).
- As a result of strong operating performance and working capital management, cash flow performance improved, with free cashflow increasing by +44 percent to $104 million.
- Balance sheet gearing decreased slightly year on year, working to improve to 2.4x (within the targeted range of 3.0x) from 2.6x. The company has $317 million in liquid assets (undrawn debt capacity).
- Strong capital returns, with a +120bps increase in ROIC to 11.8 percent. The Board declared a final dividend of 6cps (65 percent franked), helping to bring the year’s total dividends to 11cps (vs 3cps in the pcp).
Company Description
Pact Group Holdings Ltd (PGH) was established by Raphael Geminder in 2002 (Mr. Geminder remains a major shareholder with ~44% and is the brother in law of Anthony Pratt, Chairman of competitor Visy). Pact has operations throughout Australia, New Zealand and Asia and conceives, designs and manufactures packaging (plastic resin and steel) for many productsin the food (especially dairy and beverage), chemical, agricultural, industrial and other sectors.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.