Company Overview: Michael Hill International Limited is engaged in the retail sale of jewelry and related services sector. The Company's segments include Michael Hill, Emma & Roe, and Corporate & Other. The Company operates through four geographical segments: Australia, New Zealand, Canada and the United States of America. The Company operates a retail jewelry chain of over 300 Michael Hill and Emma & Roe branded stores. The jewelry collections available at Michael Hill stores include Michael Hill Designer Bridal, Infinitas, Everlight and Spirits Bay. The Company operates over 170 stores across Australia, over 50 in New Zealand, over 70 in Canada and over 10 in the United States. Emma & Roe offers a range of jewelry, such as charms, bracelets, rings, pendants and earrings that are interchangeable. Its jewelry features an array of stones, including diamonds, Murano glass and other gems. The Company's stores are located at Broadway Mall, New South Wales; Casey, Victoria, and Halls Head, Western Australia.


MHJ Details

Rise in E-commerce Sales and Key Financial Numbers: Michael Hill International Limited (ASX: MHJ) is engaged predominantly in the retail sale of jewellery and related services sector in Australia, New Zealand and Canada, and is dual-listed on the ASX and NZX. As on August 2, 2019, the market capitalisation of the company stood at ~A$190 million on ASX. The company earlier released its results for 1H FY19 in which its statutory net profit after tax witnessed a rise of 125% on a YoY basis and stood at $19.5 million while its statutory earnings before interest and tax encountered a rise of 88% and stood at $28.5 million. Coming to the company’s operational performance, its e-commerce sales encountered a rise by 68.3% and stood at $9.5 million as compared to the 1H FY18 figure of $5.6 million. It was mentioned that 6 Michael Hill stores were opened, and 3 under-performing stores were closed down during 1H FY19, resulting in a total of 311 stores trading as at December 31, 2018.

With respect to Michael Hill Australia Retail segment, the company stated that the segment got significantly impacted by a shift away from the high frequency of deep discount event days during Q1 FY19, however, the improvements were made over Christmas trading period. It was also mentioned that talented as well as experienced management team happens to be in place and the Chief Executive Officer and Executive team would be seeking ways in order to enhance strategy and deliver on new initiatives so that MHJ’s growth can be accelerated. Considering these factors, we have valued the stock using the three-year average P/E market multiples of 11.16x for FY20E with consensus EPS of $0.06 and have arrived at target price upside of double-digit growth (in %). At CMP of $0.495, the stock of the company is trading at P/E multiple 7.7x of FY20E EPS.


Key Performance Results (Source: Company Reports)

Top 10 Shareholders: The following picture provides a broader overview of the top 10 shareholders in MHJ:


Top 10 Shareholders (Source: Thomson Reuters)

Key Ratios Are Higher Than Industry Median: The company’s key ratios are higher than the broader industry median, which further strengthens the confidence in the company’s core business activities. The company’s net margin stood at 6.2% in 1H FY19, which is higher than the industry median of 4.2% and, as a result, it looks like that the company has been converting its top-line into bottom-line better than the concerned industry. The company’s EBITDA margin in 1H FY19 stood at 12.2%, which is higher than the industry median of 6.9%. Similarly, MHJ is generating better returns for its shareholders than its peers as the company reported an ROE of 10.0% in 1HFY19 as compared to the industry median of 8.1%. The current ratio stood at 2.31x in 1HFY19, which is higher than the industry median of 1.18x, implying a decent liquidity position to meet its short-term obligations.


Key Metrics (Source: Thomson Reuters)

Reducing Exposure to Debt Component Might Support in Long-Term: It looks like that the company has been reducing its dependency on the debt component as its Debt/Equity ratio in 1H FY19 stood at 0.14x which reflects a fall of 30.8% on a YoY basis. Also, the company’s long-term debt as a percentage to total capital stood at 12.4%, which implies a fall of 4.6% on a YoY basis. It can be said that the lower debt exposure reflects the deleveraging of the balance sheet. The reduced exposure towards the debt component might further stabilise the overall balance sheet and place the company in a better way to achieve long-term growth.

Key Takeaways from The Trading Update To June 30, 2019: The CEO of Michael Hill International Limited stated that even though the company is witnessing extremely competitive retail environment, primarily in Australia, with intensive competitor clearance related activities and lower foot traffic, MHJ continued to deliver the improved sales momentum for Q4. Additionally, it was stated that the e-commerce business grew at a significant rate, and the annual sales are more than double that of the largest physical store.  The company stated that the gross margin witnessed some sort of compression because of competitive retail environment as well as related clearance activity, foreign exchange headwinds which are impacting the cost of goods, and sector consolidation, which resulted in the full-year gross margin of 61.1%, as compared to 62.8% for the prior year.

 

Key Numbers of Q4 FY 2019 (Source: Company Reports)

Announcement About a Full Remediation Program: The company made an announcement of full remediation program post an initial review of Australian retail employment contracts and rostering practices demonstrated non-compliance with some requirements of General Retail Industry Award for the number of MHJ’s store-based workforce in Australia. Additionally, it was added that the company has started a more detailed review of all the employee records, rostering practices, and payments.

Announcement about Change to Financial Reporting Calendar: There are expectations that Michael Hill International Limited would be releasing the full-year results to June 30, 2019 prior to the market opening on August 16, 2019. The company is currently using a 12-month calendar for statutory reporting purposes (July 1 to June 30). MHJ intends to adopt a 52-week retail calendar year, which is generally utilised in the broader retail sector. The change to the retail calendar will apply from the commencement of MHJ’s next financial year, i.e., FY20.

Optimism on Canada: With respect to Michael Hill Canada (Retail Segment), the company added that the revenue witnessed a rise by 0.9% and stood at CA$74.4 million. The following picture provides a broader overview of the key numbers:


Michael Hill Canada (Retail Segment) (Source: Company Reports)

The company stated that Canada happens to be a core growth opportunity, and there has been a heightened focus towards increased productivity for 2H.

Overview of Three Integrated Pathways to Growth: The company’s CEO stated that there are 3 integrated pathways to growth which revolves around restoring the financial performance, resetting and enhancing the agenda and delivering a long-term strategy for the sustainable growth. With respect to a summary of key initiatives, it was stated that the company is focused towards leveraging revenue and operational synergies through the closer alignment of products sold in stores, with marketing and manufacturing functions which could prove beneficial.


Key Valuation Metrics (Source: Thomson Reuters)

What to Expect from MHJ Moving Forward: The new CEO, named Daniel Bracken identified refinements to plan and further opportunities in order to strengthen the retailing fundamentals of the business. It was also mentioned that the continued focus towards improving the overall cost of doing business resulted in the implementation of an initial $5 million annualised cost reduction programme in the month of January. Also, work has been started to capture the second tranche of a further $5 million in the annualised cost savings, over the upcoming financial year.

Considering the focus on costs, the implementation of new operating model and the delivery of numerous initiatives throughout brand, product, stores and digital, there are expectations that the company would establish itself as modern and contemporary retailer. The key priorities for 2H FY19 revolve around the implementation of more sophisticated and integrated customer-led retail operating model and the acceleration of branded collections strategy.

Stock Recommendation: The company’s stock has fallen 14.04% in the span of the previous six months while, in the time frame of the previous one month, it encountered a fall of 9.26%. As per ASX, the company’s stock price is trading towards the 52-week lower levels and, thus, it can be said that the stock is offering an opportunity to make an entry. Also, as can be seen from the company’s Debt/Equity ratio, MHJ has been reducing its exposure towards the debt component, which might help in the long-term performance. The company’s financial position can further stabilise as it is deleveraging its balance sheet position. The company’s top line has witnessed a CAGR growth of 4.43% in the time frame from FY14- FY18 which can be considered at respectable levels and, therefore, it can be said that the company is possessing decent capabilities to generate revenues. There are expectations that the revenue-generation capabilities might prove to be beneficial for the broader company moving forward. Considering these factors, we have valued the stock using the three-year average P/E market multiples of 11.16x for FY20E with consensus EPS of $0.06 and have arrived at target price upside of double-digit growth (in %). Hence, in view of above-stated facts and looking at the current trading levels, we give a “Speculative Buy” rating on the stock at the current market price of A$0.495 per share (up 1.02% on 02 August 2019), ahead of its full-year results which are to be released on 16 August 2019.

 
MHJ Daily Technical Chart (Source: Thomson Reuters)

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