Stocks’ Details

Metcash Limited

A Look at FY20 Results: Metcash Limited (ASX: MTS) is a wholesaler to independent retailers in the food, grocery, liquor, hardware, and automotive industries. The market capitalisation of the company stood at ~$2.9 billion as on 17^th July 2020. For FY20, the company reported revenue amounting to $13.0 billion, up 2.9% on FY19. The company experienced extraordinary demand in the Food pillar in the month of March and April 2020, which resulted in strong sales in FY20. Underlying earnings per share of the company went up by 1.8% to 23.0 cents, indicating the benefit of its share buy-back in FY19. The company added that all pillars have responded well to service retailers in a very challenging environment caused by bushfires and COVID-19. The company ended FY20 with net debt of $86.7 million.

Sales Revenue (Source: Company Reports)

Focus of Business: The company’s business is continuing to progress its growth initiatives, which are focused on improving the competitiveness of its retailer network. The company is also focused on costs to help offset the impact of inflation and other cost pressures. The company has scheduled to conduct its 2020 Annual General Meeting on 26th August 2020. 

Key Risks: The company is exposed to key risks arising from its financial instruments such as interest rate risk, foreign exchange risk and credit risk. The company is also sensitive to liquidity risk, which is influenced by the inability of the group to address its payment obligations. The group manages assets with liquidity and monitor future cash flows and liquidity daily to manage this risk.

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

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MTS has provided a return of 8.40% in the past six months and is trading below the average of 52 weeks’ price band. The Board of the company has resolved to pay a final dividend for FY20 of 6.5 cents per share (fully franked), bringing the total dividends for FY20 to 12.5 cents per share. The company will pay the final dividend on 5^th August 2020. In the month of April 2020, the company undertook prudent action of raising around $300 million of equity and securing an additional $180 million of short term debt facilities to strengthen its financial position considering the high level of uncertainty associated with the COVID-19 pandemic. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), etc., and arrived at a target price of high single-digit upside (in percentage terms). Considering aforesaid facts, decent growth in revenue, equity raising of $300 million, we give a “Hold” recommendation on the stock at the current market price of $2.770 per share, up down by 2.465% on 17^th July 2020.

City Chic Collective Limited

Response to Media Speculation: City Chic Collective Limited (ASX: CCX) is engaged in the retailing of women’s apparel. The market capitalisation of the company stood at ~$635.39 million as on 17^th July 2020.

Recently, there were few media reports which speculated that the company might be heading for an acquisition in the United States and there could be an equity capital raising. In response to media speculation, the company has stated that there has been no agreement on the terms of any possible acquisition nor is there any certainty that any such agreement will be reached. However, the company’s strategy includes growing its international plus-size business and global customer base. In the month of May 2020, the company has begun staged reopening of Australia and New Zealand Stores, which were temporarily closed due to COVID-19. During 1H FY20, the company reported sales revenue amounting to $104.8 million.

Sales Revenue (Source: Company Reports)

FY20 Priorities: For FY20, the company’s priorities include integrating the supply chain, improving engagement with customers, and migrating store customers to the online channel.

Key Risks: The company operates in an environment of change and uncertainty. There are various factors, which may impact the operating and financial performance of the company. These mainly include competition and consumer discretionary spending as well as exchange rates and duties.

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: During the store closure period, the company experienced online sales growth of 57%. The company is in a decent capital position with significant headroom in a $40 million debt facility. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Lovisa Holdings Ltd (ASX: LOV), Baby Bunting Group Ltd (ASX: BBN), Jumbo Interactive Ltd and arrived at a target price of high single-digit upside (in percentage terms). Hence, considering the decent online sales growth and decent capital position, we give a “Hold” recommendation on the stock at the current market price of $3.160 per share down by 0.315% on 17^th July 2020.

McPherson's Limited

Sales Revenue in Line With 1H FY19: McPherson's Limited (ASX: MCP) is a leading supplier of Health, Wellness and Beauty products in Australasia and increasingly China, with operations in Australia, New Zealand and Asia. The market capitalisation of the company stood at ~$320.72 Mn as on 17^th July 2020. During 1H FY20, the company reported underlying and statutory profit before tax amounting to $8.5 million, reflecting a rise of 9% on the previous corresponding period. Total sales revenue for the period stood at $106.0 million, which was in line with 1H FY19. The sales increased by 6% excluding the impact of recently terminated distribution agreements with Trilogy and Karen Murrell. Over the period, the company formed strategic JV with Access Brand Management (ABM) to secure distribution into the fast-growing China market.

H1FY20 Financials (Source: Company Reports)

NPAT Guidance: The business is well-positioned to continue growing in FY20. The broader retail environment in all operating geographies is likely to be impacted by the Coronavirus, mainly due to the significance of Chinese tourism and education to the South East Asian region. MCP is on track to meet its guidance of FY20 growth in profit before tax of around 10% on FY19.

Key Risks: The company’s business activities are exposed to financial risks like currency risk, interest rate risk, credit risk and liquidity risk. The company uses derivative financial instruments, such as foreign exchange and interest rate hedge contracts to minimise any adverse effects on the financial performance of the Group.

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

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Net margin of the company stood at 5.4% in 1H FY20, reflecting YoY growth of 0.2%. The stock of MCP has increased by 15.44% in the last three months and is trading close its-52-week high levels of $3.160. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with limited upside (in percentage terms). Hence, considering the current trading levels along with limited upside, we have a wait and watch stance on the stock at the current market price of $2.920 per share, down by 2.341% on 17^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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