Company Overview: Super Retail Group Limited is primarily involved in the retail industry. The Company's principal activities include retailing of auto parts and accessories, tools and equipment; retailing of boating, camping, outdoor equipment, fishing equipment and apparel, and retailing of sporting equipment, bicycles, bicycle accessories and apparel. The Company's segments include Auto, which is engaged in retailing of auto parts and accessories, tools and equipment; Leisure, which is engaged in retailing of boating, camping, outdoor equipment, fishing equipment and apparel, and Sports, which is engaged in retailing of sporting equipment, bicycles, bicycle accessories and apparel. The Company's brands include Amart Sports, which provides leisure sports products; BCF, an outdoor retailer; Rays, an outdoor entertainment and camping leisure retailer; Rebel, which provides branded sporting and leisure goods, and Supercheap Auto, a specialty retail business.
 

SUL Details

Well Diversified Business Model: Super Retail Group Limited (ASX: SUL), formerly known as Super Cheap Auto Group Limited, is primarily involved in the retail industry, which changed its name to Super Retail Group Limited in 2010. It was founded as an automotive accessories mail order business by Reg and Hazel Rowe in 1972. It is headquartered in Brisbane, Australia and is being currently headed by Mr. Anthony Heraghty – Group Managing Director and Chief Executive Officer. The company operates via three segments: Auto Segment, Outdoor Segment, and Sports Segment that contributed around 37.8%, 24.8%, and 37.3% revenue in total revenue respectively, in 1H FY 19. The company sales have grown at CAGR of 5.3% during FY14-18 on the back of the diversified business model. In FY18, the company posted decent performance as it generated Profit after tax or PAT amounting to $127.3 million implying the rise of 26.7% on the YoY basis. The top management of the company had stated that SUL’s key priority revolves around growing the share of customer spending in SUL’s markets as retail industry has been evolving with impacts of new competitors as well as of the technology. Further, the company is poised for exponential growth in the forthcoming years on the back of continued organic and inorganic growth across its all segments along with synergistic investment in developing omni-retailing capabilities. As of now, the company focuses on its robust strategy to continue to foster sustainable value creation in a changing retail environment. SUL has registered average RoE of 13.2% in the past 5 years and has now improved it to 16.5% in FY18. RoIC too has improved from an average 7.86% to 9.9% over the said period of time. On the back of decent financials, the company has maintained dividend payout ratio in the range of 55 percent and 65 percent of underlying net profit after tax and Debt/Equity ratio to 0.55x in FY18. At CMP of A$7.680, SUL is trading at a PE of 10.46x FY20E earnings. Keeping the view of decent outlook in the business with the backdrop of challenging market dynamics, we have valued the stock using the Relative valuation approach, P/E and EV/Sales and have arrived at a target price upside of about single high digit (in %). Key Risks to this include intense competition, foreign exchange risk, slow retail environment, etc.


Key Financial Metrics (Source: Company Reports, Thomson Reuters)

Decent Performance in 1HFY19 Amid Weak Retailing Environment: The company has delivered decent first half-year performance wherein top-line was up by about 6.0 percent against 1HFY18. It was mainly supported by the strong contribution from the recently acquired Macpac business and positive performance of Supercheap Auto and Rebel brand during the same period. The Group’s EBITDA increased by 11.3 percent and amounted to $166.2 Mn in 1HFY19 as compared to the prior corresponding period (PCP). NPAT stood at $ 81.6 Mn in 1H FY 19 against $74.9 Mn in 1HFY18 and marked a decent growth of 8.9 percent on PCP basis. The company’s all three segments had witnessed a rise in EBIT on the back of solid growth in the sales, focus towards maximizing cash gross profit as well as controlling the operating costs. The company is also having a decent position with respect to key margins as its net margin stood at 5.1% at the end of December 2018 which is higher than industry median of 3.9% reflecting the company’s efficiency in converting its top line into the bottom line. The company’s EBITDA margin stood at 11.8% at the end of December 2018 which implies YoY improvement of 0.6%. Also, its EBITDA margin is higher than the industry median of 9.1%. The company’s return on equity (or ROE), at the end of December 2018, stood at 9.1% while the industry median stood at 6.4%. Further, the company also stated that growth in the markets was supported by the customers shopping via digital channels. SUL had maintained robust growth in online sales as it leveraged re-platforming of all of the websites.
 

1H FY 2019 Results (Source: Company Reports)

Rise in Average Transaction Value Aided Auto Retailing Segment: The company had posted total sales amounting to $530.8 million in 1H FY19 which reflects the rise of 2.7%, with 1.8% like for like growth, on the back of rise in average transaction value. The Auto-retailing segment posted EBIT of $57.1 million which reflects the rise of 2.5% and EBITDA amounted to $74.3 million implying the rise of 4.6%. The segment’s EBITDA margin has encountered the rise of 0.3 percentage points with the improvements with respect to gross margin as well as supply chain being partly offset by the rise in operating costs implying deployment towards customer service and Omni-retail capability.


Auto Retailing Segment (Source: Company Reports)

Outdoor Retailing Business Segment – Strong performance in 1HFY19: Super Retail’s outdoor retailing segment had posted sales amounting to $348.5 million in 1H FY 2019 while the segment’s EBIT was $22.9 million reflecting the rise of 16.5% and 39.6%, respectively as compared to prior comparative period. The company stated that pricing competition with regards to fishing as well as camping segments have been active and BCF had managed to strongly defend the position as market leader. It had an impact on the gross margin but is placing the business for the market share growth. The contribution of Macpac in the sales was of $51.4 million while in EBIT the contribution was of $8.7 million. The like for like growth in the sales was of 10.8%, with especially robust growth in Australia as business benefits from the increasing presence of its brand in the marketplace. Macpac had opened a net of 5 new stores in the period which had resulted in 59 stores at the end of the period.

 
Outdoor Retailing-BCF (Source: Company Reports)

Transaction and Unit Growth Supported Sports Retailing Segment: Super Retail’s sports retailing segment had posted total sales amounting to $523.9 million reflecting the rise of 4%, with 3.2% like for like growth in the sales on the back of transaction as well as unit growth. The sales growth was robust in core Apparel, Footwear as well as Fitness categories while there was a decline in Hard Goods reflecting a rebalancing of range following transformation of former Amart Sports stores to Rebel.


Sports Retailing (Source: Company Reports)

Identification of Manager Underpayments: Super Retail Group Limited has recently stated that they would be making back payments to the retail managers after the completion of a comprehensive review of employment arrangements across the business. The review identified underpayment of overtime as well as some allowances to the retail managers. In the presentation dated February 14, 2019, the company added that $30 million after tax ($42.6 million pre-tax) of the costs related to store manager underpayments had been recognized. Of these costs, $24 million relates to the prior period costs in the restatement of the retained earnings while $6 million relates to the compensatory interest in other items not included in normalized NPAT.

Higher Dividend Yield Compared to Broader Industry: The company has a track record of consistent dividend payment with CAGR of 4.2% over the last five years. The annual dividend yield of the company is about 5.5% on a five-year average basis (FY14-18). SUL’s dividend payout ratio for FY18 is 65.4% with a dividend yield of 6.41% which is higher than the industry median (specialty retailers) of 5.8%. In 1HFY19, the Board of Directors declared fully franked interim dividend of 21.5 cents per share which will be payable on 28 March 2019 with the record date of 25 February 2019. Henceforth, the company would try to ensure that the dividend payout ratio is within the range of 55%-65% of the underlying NPAT. We presume that, moving forward, the company will continue to maintain a dividend yield of >4.3% in future which might attract the attention the market players.


Dividend Per Share Trend (Source: Company Reports)

Appointment of New Managing Director and CEO:  Super Retail had recently made an announcement that Mr. Anthony Heraghty would be succeeding Mr. Peter Birtles as the Group Managing Director and CEO or Chief Executive Officer of the company from March 31, 2019. This new appointment ensures the smooth leadership transition for the company, positioning SUL to continue the growth as well as value creation.

Drivers for Future: Super Retail Group’s strategy happens to revolve around growing the businesses in high involvement categories, engaging capable team members to share customers’ passions as well as building world-class Omni-retail organization. With respect to SCA, Rebel and BCF, in the time frame of 3 years, there are expectations for revenue growth of between 4%-6% per annum and, the company stated that there would be an improvement of 10-30 basis points in EBIT margin per annum. In the same time period, with regards to SCA, Rebel and BCF, the capital expenditure would be in the range of $80 million- $90 million per annum.

With regards to capital management, the company had objectives which revolve around maximizing the shareholder returns through focusing towards financial targets, maintaining financial strength by the safeguarding group as well as retaining the financial flexibility.


Historical PE Band (Source: Company Reports)

Stock Recommendation: In the last six months, the stock has fallen 16.03% and is trading at decent PE multiple of 11.82x, indicating undervalued scenario at the current juncture. From the technical perspective, the Exponential Moving Average or EMA has been applied on the monthly chart of SUL, and default values were used for the purposes. After observation, it was noticed that the company’s stock price might cross the EMA. If the crossover occurs, there are expectations that the stock price would witness a rise. Therefore, moving forward, the stock might witness an upward momentum.

On the other hand, the company might benefit from the decent financial position and net margin (being higher than the industry median, as mentioned above). Also, the decent dividend yield and focus towards maintaining the pay-out ratio between 55%-65% might also gain traction. Keeping the view of decent outlook in the business along with challenging market dynamics, we have valued the stock using the Relative valuation method, P/E and EV/Sales and have arrived at target price upside of about single high digit (in %). Given the backdrop of aforesaid facts and undervalued scenario at the current juncture, we have a “Buy” recommendation on the stock at the current market price of A$7.680 per share.

 
SUL Daily Chart (Source: Thomson Reuters)

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