Stocks’ Details
 

Super Retail Group Limited

Positive Sales Momentum Maintained:Super Retail Group Limited (ASX: SUL) operates specialty retail stores in the automotive, tools, leisure and sports categories. As at 26 March 2020, the market capitalization stood at ~$784.25 million. On 26 March 2020, Super Retail Group provided a like-for-like trading update as at week 38 (week ended 21 March), as per which, the Group has maintained positive sales momentum in its two largest brands and has benefitted from a diversified portfolio of businesses with store locations in both metropolitan and regional areas across Australia and New Zealand. The company further assured that Australian stores are currently trading.


Like-for-like trading Update (Source: Company Reports)

Maintaining Liquidity and Protecting Shareholder Value:Given the uncertainty regarding the duration of the COVID-19 pandemic, the company has decided to cancel the FY20 interim dividend of 21.5 cents per share, so that it could maintain liquidity and protect shareholders’ value. 

Decent Debt Facilities and Liquidity Management: The company currently has $635 million bank debt funding facility with a spread of maturities out to December 2023. In addition to this, it also secured credit approval for a new $100 million bilateral liquidity facility with ANZ Bank. In order to manage its liquidity position and preserve more cash, the company has decided to reduce the Group’s cost base, defer non-essential capital expenditure, manage working capital, reduce inventory levels and utilise government tax relief.

Valuation Methodology: Price to Book Value Multiple based Relative Valuation

 
Price to Book Value Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock is currently trading close to its 52-week low of $3.020, providing investors an opportunity for accumulation. For H1FY20, the company reported a net margin of 4% which is higher than the industry median of 3.6%. We have valued the stock using a Price to book value based relative valuation method and arrived at a target price with lower double-digit upside (in % terms).  For the purpose, we have taken peers like JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), and Metcash Ltd (ASX: MTS). Considering the company’s positive sales momentum over December quarter, decent debt facilities and recent measures to manage its liquidity position, we are giving a “buy” recommendation on the stock at the current market price of $4.280, up 7.809% on 26 March 2020, owing the recent update on Covid-19.

 
Lovisa Holdings Limited

Managing the Cost Structure: Lovisa Holdings Limited (ASX: LOV) is engaged into retailing of fast fashion jewellery. The market capitalisation of the company stood at $412.65 Mn as on 26^th March 2020. From 26 march onwards, the company’s stores in Australia, New Zealand and South Africa are temporarily closed. In France, Spain, Malaysia, the USA and UK, the company’s stores have already been closed for over a week. In order to manage the cost structure in the current climate, the company has decided to stand-down its store teams in all markets where its stores are closed and reduced the headcount in its support teams across the world. Due to the disruption caused by the temporary closure of stores, the company decided to defer the payment of interim dividend of 15 cents per share.

Strong Balance Sheet:The company has recently received approval from its existing financier for an increase in the limit of its financing facilities, as well as their extension for a further 3-year term. This is likely to further strengthen the company’s strong balance sheet position.  


Balance Sheet at end of H1FY20 (Source: Company reports)

Returning to Normalcy in China:As per the update provided on 19 March 2020, the company’s production capacity at both its suppliers and distribution hub in China have begun to return to normal levels, however the uncertainty regarding the timing of supplier deliveries still prevails. As per the outlook provided on 19 February 2020, the company expects the increase in the number of stores for FY20 to be higher than FY19, with 3 net new stores opened since the end of December 2019, taking the store network to 442.

Valuation Methodology:EV/EBITDA Multiple Based Relative Valuation

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In H1FY20, the company reported gross margin of 74.3% which is higher than 65.9% in PCP. For the same period, the company has a net margin of 16.4% which is higher than the industry median of 3.6%. Considering, the company’s recent efforts to manage its cost structure, and its strong balance sheet, we have valued the stock using EV/EBITDA based valuation method and arrived at a target price with lower double-digit upside (in % terms).  For the purpose, we have taken Peers like City Chic Collective Ltd (ASX: CCX), Super Retail Group Ltd (ASX: SUL) and Blackmores Ltd (ASX: BKL). Hence, we are giving a “Hold” recommendation on the stock at the current market price of $4.950, up by 28.906% on 26 March 2020, owing to the recent increase in the limit of its financing facilities. 
 

JB Hi-Fi Limited

Temporary Closure of JB HI-FI New Zealand Business:JB Hi-Fi Limited (ASX: JBH) is a specialty retailer of home consumer products like extensive range of consumer electronics, whitegoods, appliances and home entertainment. On 26 March 2020, the company announced the temporary closure of JB HI-FI New Zealand Business as New Zealand Government’s has placed alert level 4 restrictions that limit all ‘nonessential’ businesses. As per the announcement, JB HI-FI New Zealand’s 14 stores, online and commercial operations are closed from 26 March 2020 for a minimum period of 4 weeks. The JB HI-FI New Zealand business only represent around 3% of the Group’s total annual sales, and an FY19 EBIT loss of $1.9 million.

Strong momentum in Australia in March Quarter: From 1 January 2020 to 22 March 2020, the sales growth for JB HI-FI Australia was 9.1% with comparable sales growth of 8.8% and the total sales growth for The Good Guys was 10.4% with comparable sales growth of 10.4%. Over the March 2020 quarter, the company witnessed strong momentum in Australia. In the first half of FY20, the company has reported decent financial results with total sales up by 3.9% to $4.0 billion and NPAT up by 8.9% to $174.4 million.


H1FY20 Highlights (Source: Company Reports)

Withdrawal of FY20 Guidance: Due to the increasing level of uncertainty arising from COVID-19, the company recently withdrew its previously announced FY20 sales and earnings guidance. However, the company continues to have a strong balance sheet with significant headroom in its facilities and covenants.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: For H1FY20, JBH reported a net margin of 4.3% which is higher than the industry median of 3.6%. For the same period, the company has an asset turnover ratio of 1.29x which is higher than the industry median of 0.98x. We have valued the stock using EV/EBITDA Based Valuation and have arrived at a target price with lower double-digit upside (in % terms).For the purpose, we have taken peers like Harvey Norman Holdings Ltd (ASX: HVN), Metcash Ltd (ASX: MTS), Super Retail Group Ltd (ASX: SUL), etc. Although the company was able to maintain a Strong momentum in Australia during the March Quarter, considering the uncertainty around covid-19 impacts and the recent withdrawal of FY20 Guidance, we suggest investors to keep a close eye on the stock and have a watch stance on the stock at the current market price of $25.840, up by 9.957% on 26 March 2020. 
 
 
Comparative Price Chart (Source: Thomson Reuters)

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