Stocks’ Details

Lovisa Holdings Limited

Decent Growth in Online Business: Lovisa Holdings Limited (ASX: LOV) is an international specialist fast-fashion jewellery retailer. The market capitalisation of the company stood at ~$656.58 Mn as on 3^rd July 2020. The company recently announced that its business has re-opened in mid-April with the Australian stores. The company is currently trading from 434 stores, including franchise stores. During Q4 FY20, the company experienced a significant decline in sales due to disruption in normal trading conditions. Sales Revenue (excluding Franchise Revenue) for FY20 amounted to $237 million against $249 million in FY19. However, the online business of LOV managed to deliver growth of 256%. LOV undertook numerous actions to manage the cost structure of the business as a result of the temporary closure of the store network. During 1H FY20, the company reported revenue growth of 22.2% to around $162.8 million.


Sales Performance (Source: Company Reports)

Impairment Charges in FY20: Previously, the company announced the rollout of the store in Spain, but due to lack of support from its landlords in Spain, the company has decided not to open these stores and to exit the Spanish market. Resultantly, the company forecasts impairment charges and associated provisions against this business of around €2 million in FY20.

Key Risks: The company is exposed to foreign currency risk, which is influenced by movements in the USD exchange rate as the majority of goods imported by LOV are priced in USD. LOV’s business is also sensitive to change in prevailing fashions and consumer preferences, as its revenues are currently generated from the retailing of jewellery.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: LOV possesses a strong balance sheet with well managed robust inventory levels. The company closed FY20 with a net cash balance of A$21 million. The company also has access to undrawn financing facilities of A$44 million, which leaves the business in a decent position for investing in future growth opportunities as the global economy emerges from the current situation.Net margin of the company stood at 16.4% in 1H FY20 as compared to the industry median of 4.0%. This implies that the company has decent capabilities to convert its topline into the bottom line against the broader industry.We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Super Retail Group Ltd (ASX: SUL), City Chic Collective Ltd (ASX: CCX), Accent Group Ltd (ASX: AX1), etc., and arrived at a target price of high single-digit upside (in percentage terms). Considering the decent growth in online business, strong balance sheet with well managed robust inventory levels, improved net margin and access to undrawn financing facilities along with key risks stated above, we give a “Speculative Buy” recommendation on the stock at the current market price of $6.130 per share, up by 0.327% on 3rd July 2020.

Bapcor Limited

Strong Demand in Retail Segment:Bapcor Limited (ASX: BAP) is a distributor of automotive aftermarket parts. The market capitalisation of the company stood at ~$2.04 Bn as on 3^rd July 2020. In a recent trading update, the company stated that its businesses have witnessed stronger than expected demand, mainly in the Retail and Burson Trade segments in Australia due to easing of restrictions imposed due to COVID-19. Retail segment of the company witnessed robust demand in the month of May and June, with a rise of over 45% in Autobarn same-store sales.  However, New Zealand, Specialist Wholesale, and Thailand segments of BAP were heavily impacted by COVID-19. The below picture gives an overview of 1H FY20 financial performance:


1H FY20 Financial Performance (Source: Company Reports)

NPAT Guidance: For FY20, the company expects net profit after tax (before significant items) in the range of $84 million to $88 million on the back of a decent performance of the business in the last two months. However, this guidance is subject to normal year-end audit procedures. The company scheduled to release its FY20 results on 19^th August 2020.

Key Risks: BAP’s business is exposed to competition risk, which arises due to the competitive nature of automotive aftermarket parts and accessories distribution industry of ANZ. The company’s growth is also sensitive to the increased bargaining power of customers and supplier pressure or relationship damage. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:Recently, the company has raised $56 million from the share purchase plan, which followed the successful underwritten institutional placement of $180 million. Gross margin and EBITDA margin of the company stood at 47.5% and 14.9% in 1H FY20, reflecting YoY growth of 0.4% and 2.9%, respectively.We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as AP Eagers Limited (ASX: APE), Autosports Group Ltd (ASX: AX1), etc., and arrived at a target price of low double-digit upside (in percentage terms). Considering the aforesaid facts, demand in the retail segment, and recent capital raising, we give a “Hold” recommendation on the stock at the current market price of $5.990 per share, down by 0.498% on 3rd July 2020.

Mosaic Brands Limited

Substantial Rise in Online Sales:Mosaic Brands Limited (ASX: MOZ) is engaged in retailing women’s apparel and accessories. The market capitalisation of the company stood at ~$75.03 Mn as on 3^rd July 2020.  Recently, the company announced that it has appointed BDO Audit Pty Ltd as the auditor of the company. As per the release dated 25^th March 2020, the company announced the progressive reopening of its retail fashion stores, which commenced from 11^th May 2020. The company experienced a substantial increase in online sales of over 80%, which was supported by its nine brands and increased investment in its digital strategy. This performance indicated substantial work during the challenging time caused by COVID-19 to accelerate its strategy to expand the range of products offered and grow customer acquisition. The following picture provides an overview of 1H FY20 financial performance:


Key Financials (Source: Company Reports)

Expected EBITDA Loss:For FY20, the company expects to report EBITDA loss, and for 2H FY20, the company forecasts EBITDA loss to surpass $32.7 million due to material decline in foot traffic through March as a result of the impact of COVID-19 and the subsequent six-week closure of its stores. However, the management anticipates returning to profit in FY2021 because of their progressive reopening and the anticipated gradual recovery in customer demand.

Key Risks: The company’s business is mainly exposed to counterparty credit risk, which is influenced by default on its contractual obligation by a counterparty. This may lead to a financial loss to the Group. MOZ is also exposed to currency risk, liquidity risk, and interest rate risk.

Valuation Methodology:Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Over the span of five years, the company reported a CAGR of 41.92% in free cash flow, which reflects that the company has been effectively using its working capital. The stock of MOZ gave a return of 72.22% in the past three months. As a result, the stock is inclined towards its 52-week low levels of $0.195. We have valued the stock using a P/CF multiple based illustrative relative valuation methodand arrived at a target price of low double-digit upside (in percentage terms).For the purpose, we have taken peers such as Accent Group Ltd (ASX: AX1), Myer Holdings Ltd (ASX: MYR) and Michael Hill International Ltd (ASX: MHJ). Considering the substantial increase in online sales, prudent use of working capital, and current trading levels, key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.710 per share, down by 8.387% on 3^rd July 2020. 

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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