Stocks’ Details
 

Lovisa Holdings Limited

Decent Growth in Top-line: Lovisa Holdings Limited (ASX: LOV) is engaged into retailing of fast fashion jewellery. The market capitalisation of the company stood at $841.94 Mn as on 10^th March 2020. Challenger Limited and its entities have made a change to their substantial holdings in Lovisa on 28^th February 2020, and the current voting power stands at 6.16% as compared to the previous voting power of 5.08%. For the first half of FY20, the company reported revenue amounting to $162.8 Mn, up 22.2% on pcp. It also experienced strong growth in store numbers, which are delivering growth throughout most of the markets.

Lovisa witnessed strong sales growth across the Australia and New Zealand markets with the help of positive comparable store sales together with improvement in the online business. For the same period, the company declared fully franked interim dividend amounting to 15.0 cents per share on the back of solid balance sheet.


Financial Highlights (Source: Company Reports)

Focus for Expansion: LOV is focused towards expanding its store network, and it anticipates a rise in the number of stores in FY20 as compared to FY19.  In order to support store network growth and the larger business, the company would continue to invest in its support structures, mainly in the USA.

Valuation Methodology: P/CF Multiple Based Relative Valuation

P/CF Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Lovisa ended the half-year with solid cashflow comprising cash from operations before interest and tax of $46 Mn and operating cash conversion rate near to 100%. We have valued the stock using P/CF based relative valuation approach, and for the purpose, we have taken peers such as Temple & Webster Group Ltd (ASX: TPW), Briscoe Group Ltd (ASX: BGP), Super Retail Group Ltd (ASX: SUL) etc., and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Hence, in light of strong balance sheet and solid cashflow, we give a “Buy” recommendation on the stock at the current market price of $8.75 per share, up by 9.925% on 10^th March 2020.

Woolworths Group Limited

Decent Earnings Growth Across All Segments: Woolworths Group Limited (ASX: WOW) is involved in food, general merchandise and specialty retailing via chain store operations. The market capitalisation of the company stood at $47.26 Bn as on 10^th March 2020. Despite of operating in volatile trading environment, all businesses of WOW has delivered sales and earnings growth in H1FY20. WOW reported a rise of 6.0% to $32,410 Mn in sales from continuing operations while EBIT from continuing operations before significant items went up by 11.4% to $1,893 Mn. For the same period, the company declared an interim dividend of 46 cents per share, indicating a rise of 2.2%.


Financial Summary (Source: Company Reports)

Focus for Second Half: The company anticipates higher food inflation to continue in the Australian and New Zealand Food segment. WOW is planning to continue to scale up of X businesses to keep pace with customers’ demands and expectations.

Valuation Methodology: P/CF Multiple Based Relative Valuation

P/CF Based Valuation (Source: 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 2.9% in H1FY20 as compared to the industry median of 2.7%, reflecting decent capabilities to convert its topline into the bottom line against the peer group. We have valued the stock using Price to cash flow based relative valuation approach, and for the purpose, we have taken peers such as JB Hi-Fi Ltd (ASX: JBH), Bega Cheese Ltd(ASX: SUL) and Wesfarmers Ltd (ASX: WES) etc., and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Thus, considering growth in all businesses, decent capabilities to convert its topline into the bottom line and expected upside in valuations, we maintain a “Hold” recommendation on the stock at the current market price of $37.340 per share, down by 0.347% on 10^th March 2020.

Mosaic Brands Limited

Sound Balance Sheet: Mosaic Brands Limited (ASX: MOZ) is a retailer of apparel and accessories of women with a market capitalisation of $98.27 Mn as on 10^th March 2020. Perpetual Limited and its related bodies corporate have made a change to their substantial holdings in MOZ on 3^rd March 2020 and the current voting power stands at 14.61% as compared to the previous voting power of 12.80%. Mosaic reported a rise of 36% in earnings before interest, tax, depreciation and amortization for 1H FY20, which stood at $32.0 million. This reflects the success of its strategies and its focus on prioritising gross margin over sales. The company managed to close H1FY20 with sound balance sheet, including positive operating cash flow amounting to $12.5 million.


Half-Year Performance (Source: Company Reports)

Future Aspects: The company witnessed a minor impact on February deliveries due to the disruption to its China supply chain. If delays prove to be material, sales during the early winter season, including the key Mother’s Day period, could be affected. Overall, the company is optimistic about its strategic action, which would continue to deliver sustainable earnings growth.

Stock Recommendation: Return on equity of the company stood at 11.7% in 1H FY20 as compared to the industry median of 8.1%. Net margin of the MOZ stood at 2.8% in H1FY20, reflecting YoY growth of 0.7%. This reflects that the company has improved its capability to convert its topline into the bottom line on a YoY basis. It has EV/ Sales multiple of 0.1x as compared to the industry median (Consumer Cyclicals) of 1.4x on TTM basis. The stock of Mosaic is trading at a P/E multiple of 8.32x against the industry median (Consumer Cyclicals) of 13.4x on TTM basis. Therefore, considering the decent returns provided to shareholder and robust growth in earnings, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.96 per share, down by 5.419% on 10^th March 2020.

Metcash Limited

Payment of Interim Dividend: Metcash Limited (ASX: MTS) works as a wholesaler to independent retailers in the food, grocery, liquor, hardware and automotive industries. The market capitalisation of the MTS stood at $2.27Bn as on 10^th March 2020. The company recently announced the resignation of its Chief Financial Officer, Brad Soller. Mr. Brad will stay in the company till the appointment of a successor, which is anticipated to be completed by the end of FY21.
During 1HFY20, MTS reported revenue of $6.3 Bn up 1.6% on pcp. Underlying EBIT stood at $149.7 Mn, reflecting a fall of 5.3% primarily due to lower contribution in the Food pillar from the resolution of onerous lease obligations. The company paid a fully franked interim dividend of 6.0 cents per share on 23^rd January 2020 for H1FY20.


Sales Revenue (Source: Company Reports)

Positive Sentiments for Hardware Market: Metcash is optimistic about the market fundamentals of hardware business over the medium to longer term. Further, the company anticipates construction activity to be supported by population growth as well as undersupply of housing.

Valuation Methodology: P/E Multiple Based Relative Valuation

P/E Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Current ratio of the company stood at 1.11x in H1FY20 as compared to the industry median of 0.66x. This reflects that the company is in a decent position to address its short-term obligation against the broader industry. Debt to equity of the company stood at 1.10x in H1FY20 versus 1.58x of industry median. We have valued the stock using P/E based relative valuation approach and arrived at a target price, which is offering an upside of higher single digit (in percentage terms). Hence, considering the decent liquidity position and deleveraged balance sheet, we give a “Buy” recommendation on the stock at the current market price of $2.580 per share, up by 3.2% on 10^th March 2020.

 
Comparative Price Chart (Source: Thomson Reuters)

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