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Technology Stocks

Avita Benefits From the Incidence of Burns Normalising

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currently a skin graft sourced from elsewhere on the patient’s body. It is believed Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

Despite the technology in Avita’s RECELL system being in use since the Bali bombings in 2002, the product has had limited commercial success as it entered the market as an investigational device. This limited the reimbursement and take-up of the product. RECELL relaunched in the U.S. following randomized clinical trials and FDA approval in late 2018. Currently, it’s approved for treating second and third degree burns in adults, and Phase 3 pediatrics clinical trials began in first-quarter calendar 2020.

The treatment of severe burns in the U.S. is concentrated across the 136 burn centers, making commercial roll-out of RECELL straightforward. Of the approximately 14,000 adults with second- or third-degree burns treated at these burn centers each year, Avita could ramp-up to 37% share or 5,200 patients per year by fiscal 2026. The cost of RECELL compares favorably with a skin graft in this setting, as RECELL has a list price of USD 7,500 per single-use unit versus the USD 17,000 to USD 20,000 cost of a skin graft. It also has the benefits of shorter length of stay and fewer additional procedures.

Financial Strengths

Avita is in a solid financial position with no debt, and cash on the balance sheet of USD 111 million as at June 30, 2021, Having raised AUD 120 million in equity funding in November 2019, and a further USD 69 million in February 2021. It is expected that the operations of the company to be a net consumer of cash in fiscal years 2022, 2023, and 2024 as it scales up operations, and become free cash flow positive thereafter. Key operational cash requirements include the Salesforce and clinical trials and approvals for new indications. There is little capital investment required as the owned factory where it assembles the RECELL systems in the U.S. is currently running at only 10% capacity. 

Bulls Say

  • Avita’s RECELL system as a sound alternative treatment for large second- and third-degree burns treated in burn centers. It compares favorably on price and ease of use with new products and the existing standard of care being skin grafts.
  • The company requires little invested capital and is expected to generate very high returns once it ramps up its commercial roll-out.
  • RECELL has achieved an estimated 17% market share in its key addressable market since launching in 2019 and shows promising signs to expand its use for other indications.

Company Profile

Avita is a single product company. Its RECELL system is an innovative burn treatment device which creates Spray-on Skin from a small skin sample within 30 minutes, thus avoiding or reducing the need for skin grafts. It’s approved for the treatment of adult patients in the U.S. with pediatric clinical trials and expanded indications in soft-tissue reconstruction and vitiligo underway. It is currently in roll-out across the approximately 136 U.S. burn centers. Despite having product approval in Australia, Europe, Canada, and China, Avita is not actively marketing in those territories and focusing instead on the U.S. region. However, it is expected to gain approval and launch in Japan via distribution partner Cosmotec shortly. Avita is domiciled, and has its primary listing, in the U.S.

(Source: Morningstar)

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.

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Technology Stocks

Western Digital merger with Kioxia to Become Global NAND Behemoth

Male gamer in headphones holds joystick and playing videogame on console or desktop PC, gaming lifestyle, cybersport. Computer games player in his room with neon light, streamer

Such a deal would be a defensive, but prudent, move by Western to reinforce its competitive position in the swiftly consolidating chip market. In the long term, it is expected the NAND market to follow the dynamics of DRAM and HDDs, and consolidate down to about three leading players for a largely commodity like product. 

Western and rival Micron were interested in a Kioxia tie up. Western would be materially better off by beating Micron to the deal, either deal would create three dominant players in NAND, and Western would avoid being on the outside looking in. Nevertheless, a potential deal wouldn’t alter no-moat or stable moat trend ratings for Western. The company maintains $70 fair value estimate for Western Digital until a deal is officially announced. 

Although they are competitors, Western and Kioxia have a long-standing joint venture for their NAND manufacturing, wherein the firms invest equally, buy chips back, and compete to sell them on the open market. The potential combination would create the largest NAND supplier in the world, barely edging out current leader Samsung. 

Company’s Future Outlook

A deal would further emphasize the strategic differences between Western Digital and HDD rival Seagate. While Seagate has doubled down on mass capacity HDDs for enterprise and cloud customers, Western has diversified into flash with its 2016 SanDisk acquisition and now the potential Kioxia deal. The deal would reportedly be funded entirely through stock. For privately held Kioxia, $20 billion or more would secure a solid return, especially after pursuing a $16 billion valuation in a suspended 2019 IPO. Seagate will able to earn more attractive returns by staying out of the high-investment NAND market. 

Company Profile

Western Digital is a leading vertically-integrated supplier of data storage solutions, spanning both hard disk drives (HDDs) and solid state drives (SSDs). In the HDD market it forms a practical duopoly with Seagate, and it is the largest global producer of NAND flash chips for SSDs in a joint venture with competitor Kioxia.

(Source: Morningstar)

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.

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Technology Stocks

Afterpay’s Milestones over FY21 Illustrate It Has Much to Offer Square

The fair value estimate of Afterpay is at AUD 113 per share.  The company’s valuation assumes a 75% chance the acquisition will proceed to completion at AUD 126 per share, which is based off Square’s share price at the time of offer. 

Square’s deal to buy Afterpay looks like another move to push Square’s business model closer to that of PayPal and strengthen the bonds between its Cash App and seller businesses to create a more fleshed-out two-sided platform. The firm intends to amass Afterpay’s 16.2 million (and growing) highly-engaged shoppers and 98,200 merchant partners (most of which are large enterprises) as selling points to attract more merchants and customers. Incorporating Afterpay’s features into Square’s own offerings (and vice versa) also further enhances the product proposition to users.

The quality of Afterpay’s shoppers is well known. Not only is the number of shoppers growing, but spend per customer is rising–in fiscal 2021, more than 93% of underlying sales were made by repeat customers, while its top 10 customers (by sales) now spend 34 times per year, up 21% from a year ago. Quantitatively, the value Afterpay brings to merchants is reflected in rapid signup of merchants to the platform and the margins merchants can afford to (and are willing to) pay–merchant margins were unchanged from the prior year at 3.9% in fiscal 2021.

Company’s Future Outlook

The buy now, pay later, or BNPL, firm expects its acquisition by Square to close in the first quarter of 2022, with a scheme booklet due to be dispatched in September 2021. It is believed Afterpay’s strategy in moving beyond just extending credit to playing a larger role in a customer’s lifecycle (such as via Afterpay Money) should help dissuade customers from switching to an alternate finance provider and subsequently, entrench the durability of its growing network

Company Profile

Afterpay started its buy now, pay later, or BNPL, financing product in calendar 2015, listed on the ASX in May 2016 and merged with Touchcorp (who designed and built Afterpay’s platform software) in June 2017. Its BNPL platform allows consumers to make acquisitions at merchant partners by paying installments every two weeks. If consumers pay on time, they transact on Afterpay for free. Afterpay primarily generates revenue from receiving a margin from the merchant. Afterpay pays the merchant the full purchase price immediately on the sale, less this margin. The margin compensates Afterpay for accepting all non-payment risk, including credit risk and fraud by the consumer, and for encouraging consumers to purchase greater dollar values and transact more frequently.

(Source: Morningstar)

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.

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Dividend Stocks Expert Insights Shares

Woolworths Screens as Overvalued

operating supermarkets and discount department stores. Market capitalization is around AUD 50 billion, with annual sales of over AUD 50 billion. The fair value estimate for narrow-moat Woolworths is AUD 24. The board declared a fully franked dividend of AUD 1.08 for the full fiscal year 2021, equating to a payout ratio of 69%.

Woolworths has a narrow economic moat, characterized by an extensive supermarket store network, serviced by an efficient supply chain operation coupled with significant buying power. It operates in the very competitive supermarket and discount department store segments of the retail sector. Intense competition has taken its toll on margins. Management has reset prices lower to drive foot traffic and increase basket sizes. Volume growth is vital for maximizing supply chain efficiencies.

Australian food sales of over AUD 40 billion represented about 15% of total Australian retail sales in fiscal 2021. The percentage increases substantially if sales are strictly comparable. 

Financial Strength

Woolworths is in a strong financial position with solid gearing metrics. At the end of fiscal 2021, the balance sheet was conservatively geared and EBITDA covered interest expenses 7 times. After the AUD 2 billion share buyback, Woolworth’s investment-grade credit rating is expected to be the same. Woolworths generates large cash flow with significant negative working capital. Cash flow comfortably finances capital expenditure. The balance sheet is robust, and acquisitions are generally bolt-on and funded with cash or existing debt facilities.

Woolworths is well positioned to withstand cyclically weak consumer spending. Woolworths is a defensive stock, with food retailing generating most of group revenue and profit, a solid balance sheet, and a narrow moat surrounding its economic profits. Woolworths last traded price was 40.99 AUD, whereas its fair value is 24 AUD, which makes it an overvalued stock. As per the analysts, the group’s operating earnings will shrink by about a quarter in fiscal 2022 with the demerger of Endeavour.

Bull Says

  • Woolworths’ dominant position in the supermarket sector is entrenched and, coupled with first-class management, suggests that it can maintain leadership in the sector.
  • Woolworths’ operating leverage could lead to a rebound in operating margins, driving cash generation that funds expansion and acquisitions while allowing capital-management initiatives.
  • The refurbishing of the existing supermarket fleet and rollout of revised store formats, with significantly improved service, convenience and product offerings could increase store productivity and lead to higher sales growth.

Company Profile

Woolworths is Australia’s largest retailer. Operations include supermarkets in Australia and New Zealand, and the Big W discount department stores. The Australian food division constitutes the majority of group EBIT, followed by New Zealand supermarkets, while Big W is a minor contributor.

(Source: Morningstar)

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.

Categories
Global stocks Shares

Coty’s Turnaround Is Progressing Faster than Expected

besting $1.0 billion estimate, as sales in the long-troubled mass beauty segment rebounded from the pandemic faster than expected. The strength was driven by Cover Girl, the cornerstone of the segment, which experienced its first full quarter of market share gains in five years, on the heels of the brand’s relaunch, supported by a new lineup of clean ingredient products and a robust marketing campaign. 

While Coty’s net debt/adjusted EBITDA remains quite high at 5.3 times at the end of June, the firm closed its fiscal year with $2.3 billion in liquidity, which should be sufficient to meet its needs over the next year ($240 million in capital expenditures, $100 million in preferred dividends, and $25 million in debt maturities).

CEO Sue Nabi laid out her turnaround strategy last year, which calls for Coty to increase its exposure to high growth markets where it had been historically underexposed. But the firm has been able to improve quickly the trends, in the face of a global pandemic, nonetheless. 

Company’s Future Outlook

For fiscal 2021, Coty’s adjusted operating margin was 8.8% compared with 6.9% in fiscal 2019, given positive mix shifts to more profitable channels (e-commerce and prestige) and categories (skincare), lower obsolescence charges, temporarily reduced marketing expenses, and over $330 million in permanent fixed cost reductions. Coty’s fiscal 2022 guidance also exceeds forecast, calling for low-teen organic sales growth, and $900 million in adjusted EBITDA, compared with estimates of 9% growth and $800 million in adjusted EBITDA. Although material increase in Coty’s intrinsic value is anticipated, its fair value is still under review, in order to revisit the long term forecast and the implications of its planned IPO of a stake in its Brazilian beauty business.

Company Profile

Coty is a global beauty company that sells fragrances (56% of fiscal 2020 revenue), color cosmetics (31%), and skin/body care (13%). The firm licenses brands such as Calvin Klein, Hugo Boss, Gucci, Burberry, and Davidoff for its prestige portfolio. Coty’s most popular color cosmetic brands are Cover Girl, Max Factor, Rimmel, Sally Hansen, and Kylie. Coty also holds a 40% stake in a salon and retail hair care business, including brands Wella, Clairol, OPI, and ghd. Francois Coty founded the firm in 1904 and it remained private until its 2013 IPO. It had focused on prestige fragrances and nail salon brands until the 2016 acquisition of Procter & Gamble’s beauty care business. This nearly doubled the firm’s revenue base, and launched it into mass channel cosmetics and professional hair care.

(Source: Morningstar)

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.

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Global stocks Sectors

Perpetual Ltd. Asset under Management increases by 246% over pcp to $98.3 bn

Investment Thesis:

  • PPT is a business having vast diversification, with earnings obtained from trustee services, financial advice and funds management.
  • PPT has a chance to increase FUM (Funds Under Management) through its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity. 
  • PPT maintains FUM in Australian equities, which is of maximum amount. This equates to levelled earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds).
  • Inflow of funds from retail and institutional investors are expected to be high especially from positive compulsory superannuation trend and Perpetual Private. 
  • Perpetual Private’s high potential to ramp up growth in funds under management and funds under advice.
  • Process of cost improvements in Perpetual Private and Corporate Trust.

Key Risks:

  • Probability of any significant underperformance across funds.
  • Key man risk surrounding key management or investment management personnel.
  • Probability of change in regulation (superannuation) with major interest on retirement income (annuities) than creation of wealth.
  • The average base management fee (bps) annually (excluding performance fee) continues to be stable at ~70bps but there are risks caused due to drawbacks from pressures on fees.
  • The provision of financial advice and Perpetual Private adjoins more regulation and compliance costs.
  • Industry funds, which are building in-house capabilities (~15-20% of total PPT funds under management), have good exposure.

Key Highlights:

  • The operating revenue increased +31% and underlying profit after tax was up +26% post the acquisition of Trillium and Barrow Hanley.
  • Statutory NPAT decreased -9% because of the significant one-off costs.
  • PPT’s assets under management increased by +246% over pcp (previous corresponding period) to $98.3bn, wherein significant amount of funds outperformed their respective benchmarks over the year.
  • Fully franked final ordinary dividend of A$0.96 per share was declared, thereby amounting the total FY21 dividend to A$1.80 per share, which is up +16% over pcp.
  • Perpetual Asset Management Australia delivered total revenue of A$165.7m, which was down -5% over pcp.
  • Perpetual Asset Management International (new international division comprising the Trillium and Barrow Hanley businesses), had total revenue of A$139.2m and underlying profit before tax was A$40.7m.
  • Perpetual Private delivered total revenue of $183.8m, relatively unchanged over pcp and underlying profit before tax of A$35m.
  • Perpetual Corporate Trust delivered total revenue of $134.9m, up +7% over pcp and underlying profit before tax of A$63.8m, which was +9% higher over pcp.

Company Profile:

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core divisions in Perpetual Investments (one of Australia’s largest investment managers); Perpetual Private (one of Australia’s premier high net worth advice business); and Perpetual Corporate Trust (which provides trustee services). PPT looks after ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as on 30 June 2021).

(Source: Banyantree)

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.

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Shares Small Cap

SkyCity’s Business to Sit on the Sidelines Amid Travel Restrictions

buoyed by the recovery from current coronavirus-induced lows and solid performance from its core assets in Auckland and Adelaide. SkyCity’s Auckland and Adelaide properties underpin the firm’s narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licences (exclusive licence for Auckland expires in 2048, and Adelaide licence expires in 2085 with exclusivity guaranteed until 2035). The quality of these assets, particularly SkyCity Auckland, has helped build the firm’s VIP gaming business.

SkyCity’s exposure to the volatile VIP gaming market is smaller than that of Australian rivals Crown Resorts and Star Entertainment. VIP revenue typically represents over 20% of Crown’s and Star’s sales, compared with SkyCity’s typical 10%-15%. While high rollers have no alternatives when in Auckland or Adelaide, SkyCity effectively competes as a destination casino on a global scale against locations such as The Star in Sydney and Crown Melbourne. This includes a NZD 750 million upgrade to SkyCity Auckland to be completed by the end of calendar 2024 and a AUD 330 million expansion for SkyCity Adelaide, a transformational project completed in fiscal 2021.

Financial Strength 

Despite near-term earnings weakness, SkyCity’s balance sheet remains robust, bolstered by a NZD 230 million capital raise completed at the end of fiscal 2020 and extensions to new and existing debt facilities. As expected, SkyCity declared a final dividend in the second half of fiscal 2021, following the June 30, 2021 covenant testing date. We expect SkyCity’s balance sheet to continue to improve over coming years as earnings recover, with net debt/EBITDA dropping below 1.0 in fiscal 2024 as expansionary projects roll off and earnings recover. 

Our fair value for SkyCity to NZD 3.80, from NZD 3.50, following the release of fiscal 2021 results. The raise on our fair value estimate is principally due to a more positive outlook on capital expenditure as SkyCity’s major expansion projects roll off and insurance payments are set to cover the majority of growth expenditure earmarked for the next three years. Despite New Zealand recently shifting back into stage 4 lockdown, SkyCity’s longdated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm’s narrow moat, and position the business well to participate in the recovery as restrictions ease. 

The payout ratio is well-supported by SkyCity’s balance sheet. The completion of the NZD 330 million Adelaide expansion in fiscal 2021 takes some pressure off cash flows, and of the further NZD 500 million in capital expenditure flagged for the NZICC project, around NZD 380 million will be funded by insurance payments to be received following the NZICC fire. The NZD 750 million NZICC/Horizon Hotel project (which helped secure licensed exclusivity at the core Auckland casino) has been delayed by a fire, with completion now expected in late calendar 2024.

Bulls Say’s 

  • Long-dated exclusive licences to operate the only casino in Auckland and Adelaide allow SkyCity to enjoy economic returns in a regulated environment.
  • We expect transformative capital expenditure at SkyCity’s Auckland and Adelaide casinos will lead to a sizable step-up in earnings.
  • SkyCity is well positioned to benefit from the emerging middle and upper class in China.

Company Profile 

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino licence (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive licence expiring in 2035).

(Source: Morningstar)

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.

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Shares Technology Stocks

Salesforce Margin Performance Bodes Well Long-Term; FVE up to $292

Online stock exchange team

Even as revenue growth is likely to dip below 20% for the first time at some point in the next several years, ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer. Sales force’s fair value estimate increased to $292.

Sales Cloud represents the original sales force automation product, which streamlined process management for sales leads and opportunities, contact and account data, process tracking, approvals, and territory tracking. Service Cloud brought in customer service applications, and Marketing Cloud delivers marketing automation solutions.  Sales force Platform also offers customers a platform-as-a-service solution, complete with the App Exchange, as a way to rapidly create and distribute apps. 

Sales force is widely considered a leader in each of its served markets, which is attractive on its own, but the tight integration among the solutions and the natural fit they have with one another makes for a powerful value proposition. To that end, more than half of enterprise customers use multiple clouds. Further, customer retention has gradually improved over time and is better than 90.

Financial strength

Salesforce.com is a financially sound company. The last traded price of Salesforce was 260.85 USD while its FVE (Fair value Estimate) is 292.00 USD, which shows that Salesforce has potential to grow.

Revenue is growing rapidly, while margins are expanding. As of Jan. 31, Salesforce.com had $12.0 billion in cash and investments, offset by $2.7 billion in debt, resulting in a net cash position of $9.3 billion.  Further, Salesforce generated free cash flow margins in excess of 17% in each of the last four years, including 18% in fiscal 2021, which was negatively impacted by COVID-19. In terms of capital deployment, Salesforce makes acquisitions rather than pay a dividend or repurchase shares. 

Bull Says

  • Salesforce.com dominates the SFA space but still only controls 30% in a highly fragmented market that continues to grow double digits each year, suggesting there is still room to run.
  • The company has added legs to the overall growth story, including customer service, marketing automation, e-commerce, analytics, and artificial intelligence.
  • Salesforce.com’s margins are subscale, with a runway to more than 100 basis points of operating expansion annually for the next decade. Indeed, management has put more emphasis on expanding margins in recent quarters.

Company Profile

Salesforce.com provides enterprise cloud computing solutions, including Sales Cloud, the company’s main customer relationship management software-as-a-service product. Salesforce.com also offers Service Cloud for customer support, Marketing Cloud for digital marketing campaigns, Commerce Cloud as an e-commerce engine, the Sales force Platform, which allows enterprises to build applications, and other solutions, such as Mule Soft for data integration.

(Source: Morningstar)

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.

Categories
Global stocks Shares

Perpetual Ltd. Asset under Management increases by 246% over pcp to $98.3 bn

Investment Thesis:

  • PPT is a business having vast diversification, with earnings obtained from trustee services, financial advice and funds management.
  • PPT has a chance to increase FUM (Funds Under Management) through its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity. 
  • PPT maintains FUM in Australian equities, which is of maximum amount. This equates to levelled earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds).
  • Inflow of funds from retail and institutional investors are expected to be high especially from positive compulsory superannuation trend and Perpetual Private. 
  • Perpetual Private’s high potential to ramp up growth in funds under management and funds under advice.
  • Process of cost improvements in Perpetual Private and Corporate Trust.

Key Risks:

  • Probability of any significant underperformance across funds.
  • Key man risk surrounding key management or investment management personnel.
  • Probability of change in regulation (superannuation) with major interest on retirement income (annuities) than creation of wealth.
  • The average base management fee (bps) annually (excluding performance fee) continues to be stable at ~70bps but there are risks caused due to drawbacks from pressures on fees.
  • The provision of financial advice and Perpetual Private adjoins more regulation and compliance costs.
  • Industry funds, which are building in-house capabilities (~15-20% of total PPT funds under management), have good exposure.

Key Highlights:

  • The operating revenue increased +31% and underlying profit after tax was up +26% post the acquisition of Trillium and Barrow Hanley.
  • Statutory NPAT decreased -9% because of the significant one-off costs.
  • PPT’s assets under management increased by +246% over pcp (previous corresponding period) to $98.3bn, wherein significant amount of funds outperformed their respective benchmarks over the year.
  • Fully franked final ordinary dividend of A$0.96 per share was declared, thereby amounting the total FY21 dividend to A$1.80 per share, which is up +16% over pcp.
  • Perpetual Asset Management Australia delivered total revenue of A$165.7m, which was down -5% over pcp.
  • Perpetual Asset Management International (new international division comprising the Trillium and Barrow Hanley businesses), had total revenue of A$139.2m and underlying profit before tax was A$40.7m.
  • Perpetual Private delivered total revenue of $183.8m, relatively unchanged over pcp and underlying profit before tax of A$35m.
  • Perpetual Corporate Trust delivered total revenue of $134.9m, up +7% over pcp and underlying profit before tax of A$63.8m, which was +9% higher over pcp.

Company Profile:

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core divisions in Perpetual Investments (one of Australia’s largest investment managers); Perpetual Private (one of Australia’s premier high net worth advice business); and Perpetual Corporate Trust (which provides trustee services). PPT looks after ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as on 30 June 2021).

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.

Categories
Philosophy Technical Picks Technology Stocks

Super Retail’s strong balance sheet with plenty of room to invest

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.