Company Overview: Adairs Limited (ASX: ADH) is an omni-channel speciality retailer that provides furniture, homewares, and home furnishings via retail stores and online channels. The company has three operating vertically integrated brands in the home category, namely (1) Adairs, (2) Mocka and (3) Focus on Furniture. The company started trading on ASX in June 2015.

ADH Details

Growth Across its Portfolio of Brands & Acquisition Synergies Aids ADH: The company has built a robust foundation for future growth across its Adairs and Mocka brands by implementing various strategic initiatives in 1HFY22, including the acquisition of Focus on Furniture (“Focus”) brand. The company witnessed a rise in multi-channel shoppers as more customers were comfortable shopping online and in-store. Despite the COVID-19 led uncertainties, the company’s new National Distribution Centre (NDC) is now operating and expected to deliver profitable growth. In 1HFY22, ADH opened two new stores, expanded four existing stores, and invested higher in digital capabilities.

Business Model Highlight (Source: Analysis by Kalkine Group)

Sneak Peek at 1HFY22 Results:

• Group Sales Highlights: During the period, the company reported a slight decline of 0.5% on a year over year basis in its group sales to $ $241.8 million, which included ~$12.5 million contributions from Focus on Furniture. Group online sales (excluding Focus) witnessed a rise of 8.2% on pcp basis and came in at $97.6 million, accounting for 42.6% of Group Sales in 1HFY22. Group’s Like-for-like sales went up by 2.7% year over year (excluding Focus on Furniture Impact).
• EBIT & NPAT Performance: Underlying EBIT for 1HFY22 stood at $32.9 million (including a c.$2.9 million contribution from Focus on Furniture), compared to $60.2 million in 1HFY21, and $22.6 million in 1HFY20. Statutory NPAT for 1HFY22 came in at $17.6 million, whereas EPS for the period stood at 10.4 cents per share.
• Liquidity Position: As at 26 December 2021, the company had a cash balance of $29.12 million, up from $25.97 million as at 27 June 2021. The company witnessed net inflows of $30.84 million in 1HFY22. Net debt at the end of 1HFY22 stood at $89.6 million following the acquisition of Focus on Furniture and the final payment to the Mocka founders.

Brands Highlight (Source: Analysis by Kalkine Group)

Key Metrics: For 1HFY22, ADH reported a net margin of 7.3%, higher than the industry median figure of 6.5%.  Current ratio for H1FY22 stood at 0.98x, up from 0.74x in 1HFY21.

Liquidity Profile (Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 16.98% of the total shareholding, while the top four constitute the maximum holding. Vinva Investment Management Limited and Mitsubishi UFJ Financial Group Inc are holding a maximum stake in the company at 4.95% and 1.82%, respectively, as also highlighted in the chart below:

(Analysis by Kalkine Group)

Dividend Track Record: ADH has a decent track record of rewarding shareholders through dividends. For 1HFY22, the company has paid an interim fully franked dividend of 8 cents per share, with a payment date of 14 April 2022. At a CMP of $2.81, the company’s annual dividend yield stood at ~6.45%.

Dividend History (Source: Analysis by kalkine Group)

Key Risks: The company is exposed to the risks related to the COVID-19 challenges, including government-mandated store closures, vaccination requirements, etc. Due to escalating COVID-19 risk, management chose to stop the transition and retain the Moorabbin warehouse operations until FY22-end, which has resulted in higher warehouse costs in FY22. Due to the global supply chain conditions, the freight and other sourcing costs have increased, which might place additional downward pressure on gross margins.

Outlook: The company expects clear growth opportunities in 2HFY22, given the good in-country stock levels.  ADH expects its member retention initiatives and the facilitation of online sign-ups to offer significant upside to existing growth rates. Further, ADH believes that the growing store floor space through new and up-sized stores will help in driving store sales. ADH remains on track with ongoing investment in digital programmes, supply chain strategy for FY22 and beyond, new store openings, and the National Distribution Centre completion.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last nine months, the stock has been corrected by ~32.93% and is trading lower than the average 52-week price level band of $2.66 - $4.91, offering a decent opportunity for accumulation. The stock has been valued using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount as compared to its peer, considering inherit investment, higher debt levels, challenges associated with the COVID-19 pandemic, etc. For valuation purposes, peers like Accent Group Ltd (ASX: AX1), Nick Scali Ltd (ASX: NCK), Peter Warren Automotive Holdings Ltd (ASX: PWR), and others have been considered. Considering the company’s decent growth in H1FY22, Group online sales (excluding Focus), synergies from acquisition, diversified business model, modest long-term outlook, indicative upside in the valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the closing market price of $2.83, up by ~1.433% as on 28 April 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

ADH Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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