Super Retail Group Ltd SUL (XASX)

Transcription

1 Morningstar Equity Analyst Report Report as of 19 Nov 2015 Page 1 of 9 Morningstar Pillars Analyst Quantitative Economic Moat None None Valuation QQ Overvalued Uncertainty High Medium Financial Health Moderate Source: Morningstar Equity Research Quantitative Valuation AUS t Current 5-Yr Avg Sector Country Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Source: Morningstar Bulls Say OAn impressive management team, evidenced in continuous working capital improvements and successful BCF rollout. OThe company has successfully taken advantage of weakened competition. OThe Rebel Group offers solid improvement potential. Bears Say SUL Undervalued Fairly Valued Overvalued OLimited growth prospects in the core business. OThe size of the Rebel Group acquisition means weakness in that business could materially damage shareholder returns. OMiddle-lower income target demographic is sensitive to economic cycles. Super Retail Group Reports a Solid Start to Fiscal 2016; In Line With our Forecasts Investment Thesis Super Retail Group operates in Australia and New Zealand, selling automotive accessories, cycles and accessories, sporting goods, and camping, fishing and boating equipment. Growth is chiefly from the new BCF (Boating, Camping and Fishing) chain. Acquired in 2011, The Rebel Group sporting goods chain potentially offers another growth leg. Super Retail Group is positioned as a value retailer with an offer to beat any price. The target demographic is middle to lower income earners, a customer segment more sensitive to economic cycles. The company is very well managed, evidenced by strong returns on capital, continuous supply chain efficiency gains and an ability to generate growth during periods of weak retail demand. The stock tends to be oversold at times of expected weakening in the economic cycle. A persistently high petrol price may significantly weaken demand. The stock is suitable for investors comfortable with a medium to high level of risk, seeking both capital growth and a reasonable dividend return. Super Retail Group has no moat other than considerable management skill and customer goodwill. At June 2015, there were approximately 300 stores in the Supercheap Auto, or SCA, chain; 170 stores in leisure retailing; and 162 Rebel stores. Management has identified the potential for about 350 SCA stores, 220 leisure retailing stores and 250 sports retailing stores. The success of the more recently established BCF chain is testament to management's sound judgment and ability to execute, and to the effectiveness of the group's established business infrastructure. In second-half 2008 Super Retail Group established a bicycle products chain, which has failed to live up to expectations. Capital invested in this venture is relatively insignificant. In October 2011 Super Retail Group announced the acquisition of the Rebel Group sports store chain from private equity for AUD 610 million, equating to a fiscal 2011 enterprise value/ebitda multiple of 8.2 times. Management continues to reduce cost of goods, and to refine the supply chain and other aspects of business infrastructure. These include sourcing more product directly, and increasing the proportion of housebrand product. Super Retail Group has in-house managed distribution centres in Melbourne, Perth, Brisbane and Auckland. The group established its overseas sourcing office in Hangzhou to the west of Shanghai in October The sourcing team has a focus not only on sourcing new and lower-cost product but also on improving quality, packaging and supply chain efficiencies. Farina Parsons, Analyst, 20 October 2015 Analyst Note Super Retail Group provided a reasonable trading update for the 16 weeks to 17 October 2015 at its annual general meeting. Sales trends in auto and sports divisions have improved slightly since the company reported its full-year fiscal 2015 results in August. Like-for-like sales growth in the auto division was 3%, a slight improvement on the 2.5% for the first seven weeks of fiscal Sports recorded like-for-like sales growth of 5%, an improvement on the 4.5% growth for the first seven weeks. Leisure like-for-like sales growth was 5%, decelerating from 10% for the first seven weeks--however, this was unsurprising as the clearance program in Ray's Outdoors temporarily boosted sales during this period. The pleasing aspect of the improving trading momentum is that it was achieved despite lower promotional activity. While gross margins and earnings before interest and tax margins were not quantified, management reported that these are tracking ahead of the prior comparable period. Management reaffirmed capital expenditure guidance of AUD 100 million. We have made no changes to our earnings estimates with the trading update in line with our forecasts. Our fair value estimate remains AUD 8.50 with the shares currently trading marginally above our assessment of fair value. We maintain our no-moat rating on Super Retail Group. Despite its solid management team, national presence and value offering which appeals to frugal consumers, its business model has no sustainable competitive advantages in our view and is easily replicable. While the store rollout program will likely lead to returns on capital which exceed cost of capital in the medium term, we expect these to taper off in the long term as the store rollout reaches maturity.

2 Morningstar Equity Analyst Report Page 2 of 9 Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE Amazon.com Inc AMZN USD 311, , ebay Inc EBAY USD 34,519 17, O'Reilly Automotive Inc ORLY USD 26,574 7, AutoZone Inc AZO USD 23,881 10, Economic Moat We do not view Super Retail Group as having an economic moat. The company operates a portfolio of retail brands selling automotive accessories, cycle accessories, sporting goods and camping, fishing and boating equipment. A store rollout program supplements underlying revenue growth as the group builds scale across its different brands. The company has been successful in offering consumers value in times of cyclical weakness. However we view its brands as replicable with low barriers to entry and hence we do not view the company as having a sustainable competitive advantage or economic moat. Products are largely imported from Asia with the company implementing an efficient distribution platform to funnel products across Australia. This distribution platform lends itself to improving returns on capital as the revenue base of the company builds, with higher sales volumes reducing the unit cost of distribution. We expect the company can continue to increase the number of stores across each brand. We anticipate brand immaturity will enable the group to generate returns above its cost of capital during our five-year forecast period as the store rollout program is executed. However, following this period, we expect returns on capital to taper off as the company will have reached its saturation point and there will be no further drivers of higher returns, leaving the company susceptible to competition from new entrants and online competitors. We expect these headwinds will constrict comparable revenue growth while ongoing operating costs will cause return on capital to reduce towards the weighted average cost of capital. For this reason we do not view the company as having an economic moat. Online operators are positioned to leverage their low operating costs to offer compelling prices despite operating under comparably lower sales volumes to established bricks-and-mortar stores. Valuation Our fair value estimate of AUD 8.50 is maintained. Revenue grows at an average compound rate of 5.0% per annum during the five years to fiscal 2020, EBIT at 12.2%, and earnings per share at 10.3%. Cost of equity is 11%. EBIT margin strengthens from 6.9% to 9.6%. Growth is predominantly coming from new stores and like-for-like growth, while the Rebel Group adds another significant growth leg. We forecast return on equity to strengthen from 10.6% in fiscal 2015 to 17.5% in fiscal Risk Demand will fluctuate with the retail cycle. The offer is largely discretionary. This makes for an inherently volatile share price. There are few barriers to entry. Super Retail Group's primary competitive advantage is scale, which has enabled the development of an efficient supply chain, and comprehensive and flexible product ranging and competitive pricing. Management Our stewardship rating for Super Retail is Exemplary. Current CEO Peter Birtles joined the company in 2001 as CFO and became CEO in Through a strategy of expanding the value proposition and excellence in supply chain and logistics management, from the core auto business into other categories, the company has grown from 71 stores in 2001 to more than 600. The board comprises five directors, with most having a broad range of experience across a number of industries including accounting, law, and retailing, all relevant to Super Retail. Robert Wright has been chairman since 2009, after joining the board in He is a highly experienced professional director and has 30 years' financial management experience, including as finance director of David Jones. Founder, Reg Rowe, also sits on the board. He was formerly Super Retail's managing director and was chairman from 1996 to Executive remuneration is reasonable and combines base salary with short- and long-term incentives. Short-term incentives are based on 12 key performance indicators

3 Morningstar Equity Analyst Report Page 3 of 9 which include sales, profit and debt targets. Long-term incentives are performance rights based on 10% earnings per share and 15% return on capital targets and vest between three and five years from grant date.

4 Morningstar Equity Analyst Report Page 4 of 9 Analyst Notes Archive Super Retail Group Reports a Solid Start to Fiscal 2016; In Line With our Forecasts Farina Parsons, Analyst, 20 October 2015 Super Retail Group provided a reasonable trading update for the 16 weeks to 17 October 2015 at its annual general meeting. Sales trends in auto and sports divisions have improved slightly since the company reported its full-year fiscal 2015 results in August. Like-for-like sales growth in the auto division was 3%, a slight improvement on the 2.5% for the first seven weeks of fiscal Sports recorded like-for-like sales growth of 5%, an improvement on the 4.5% growth for the first seven weeks. Leisure like-for-like sales growth was 5%, decelerating from 10% for the first seven weeks--however, this was unsurprising as the clearance program in Ray's Outdoors temporarily boosted sales during this period. The pleasing aspect of the improving trading momentum is that it was achieved despite lower promotional activity. While gross margins and earnings before interest and tax margins were not quantified, management reported that these are tracking ahead of the prior comparable period. Management reaffirmed capital expenditure guidance of AUD 100 million. We have made no changes to our earnings estimates with the trading update in line with our forecasts. Our fair value estimate remains AUD 8.50 with the shares currently trading marginally above our assessment of fair value. We maintain our no-moat rating on Super Retail Group. Despite its solid management team, national presence and value offering which appeals to frugal consumers, its business model has no sustainable competitive advantages in our view and is easily replicable. While the store rollout program will likely lead to returns on capital which exceed cost of capital in the medium term, we expect these to taper off in the long term as the store rollout reaches maturity. the result as reasonable since about 30% of sales in the auto business came from the state of Queensland which is reeling from weak consumer spending. We expect Queensland to remain challenging in fiscal 2016, putting pressure on like-for-like sales growth. We think new store openings should support our 5% total revenue growth forecast for fiscal Pleasingly, the impact of the lower Australian dollar on product costs during the year was minimal, as evidenced by the 0.2% increase in gross margins. We forecast flat margins for fiscal 2016 given the impact of lower Australian dollar is offset by improved sourcing. As expected, the leisure segment came under pressure, posting a decline of 15% in EBIT to AUD 32 million largely as the result of Ray's Outdoors clearance activity. We expect margins to remain under pressure in fiscal 2016, given further clearance activity in Ray's Outdoors and competitive pricing pressures across the entire industry. The sports division reported slightly below our expectations with EBIT increasing by 11.5% to AUD 74 million. Gross margin, however, fell by 1% as the result of promotional activity and clearance of excess inventory. We expect slight margin improvement in fiscal 2016 as the result of improved mix and less promotional activity. Our longer-term earnings forecasts are broadly unchanged and our fair value estimate of AUD 8.50 remains. Shares trade above our assessment of fair value as the market appears to be taking a more positive view on the strength of future earnings. Despite a nationwide store network and an appealing value offering, its business model is replicable with no sustainable competitive advantages, hence our no-moat rating on the company. Super Retail Results In Line, Queensland to Remain a Drag in 2016 Super Retail Group reported net profit after tax, or NPAT, of AUD 81 million, down 25% year on year and in-line with our expectations. The auto division recorded earnings before interest and tax, or EBIT, of AUD 96 million, up 1.6% and in line with our forecasts. We view

5 Quantitative Equity Report Release Date: 19 November 2015 Reporting Currency: AUD Trading Currency: AUD Page 1 of 1 Page 5 of 9 Super Retail Group Ltd SUL Last Close Quantitative Fair Value Estimate Market Cap (Mil) Sector Industry Country of Domicile ,942.2 t Consumer Cyclical Specialty Retail AUS Australia Super Retail Group Ltd operates in Australia and New Zealand. It sells automotive accessories, cycles and accessories, sporting goods, and camping, fishing and boating equipment. Quantitative Scores Scores All Rel Sector Rel Country Quantitative Moat None Valuation Overvalued Quantitative Uncertainty Medium Financial Health Moderate AUS t SUL Undervalued Fairly Valued Overvalued Valuation Current 5-Yr Avg Sector Country Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales Profitability Current 5-Yr Avg Sector Country Return on Equity % Return on Assets % Revenue/Employee (K) Quantitative Moat Financial Health Current 5-Yr Avg Sector Score Country Distance to Default Solvency Score Assets/Equity Long-Term Debt/Equity Price Versus Quantitative Fair Value Quantitative Fair Value Estimate Total Return Sales/Share Forecast Range Forcasted Price Dividend Split Momentum: Standard Deviation: Wk Yr Total Return % / Market (Morningstar World Index) Dividend Yield % Price/Earnings Price/Revenue Undervalued Fairly Valued Overvalued 2,966 Monthly Volume (Thousand Shares) Liquidity: High TTM Financials (Fiscal Year in Mil) 1,092 1,654 2,020 2,112 2,239 2,239 Revenue % Change Operating Income % Change Net Income Operating Cash Flow Capital Spending Free Cash Flow % Sales EPS % Change Free Cash Flow/Share Dividends/Share Book Value/Share 194, , , , , ,177 Shares Outstanding (K) Profitability Return on Equity % Return on Assets % Net Margin % Asset Turnover Financial Leverage Gross Margin % Operating Margin % Long-Term Debt Total Equity Fixed Asset Turns Growth Per Share 1-Year 3-Year 5-Year 10-Year Revenue % Operating Income % Earnings % Dividends % Book Value % Stock Total Return % Semi-Annual Revenue & EPS Revenue (Mil) Sep Dec Mar Jun Total , , , , , , , , ,654.1 Earnings Per Share () Revenue Growth Year On Year % Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call To license the research, call ß

6 Morningstar Equity Analyst Report Page 6 of 9 Morningstar Equity Research Methodology Fundamental Analysis At Morningstar, we believe buying shares of superior businesses at a discount and allowing them to compound over time is the surest way to create wealth in the stock market. The long-term fundamentals of businesses, such as cash flow, competition, economic cycles, and stewardship, are our primary focus. Occasionally, this approach causes our recommendations to appear out of step with the market, but willingness to be contrarian is an important source of outperformance and a benefit of Morningstar s independence. Our analysts conduct primary research to inform our views on each firm s moat, fair value and uncertainty. Fundamental Analysis Economic Moat Rating Economic Moat Fair Value Estimate Uncertainty Assessment QQQQQ QQQQ QQQ QQ Q Star Rating The economic moat concept is a cornerstone of Morningstar s investment philosophy and is used to distinguish high-quality companies with sustainable competitive advantages. An economic moat is a structural feature that allows a firm to sustain excess returns over a long period of time. Without a moat, a company s profits are more susceptible to competition. Companies with narrow moats are likely to achieve normalized excess returns beyond 10 years while wide-moat companies are likely to sustain excess returns beyond 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe lower-quality no-moat companies will see their returns gravitate toward the firm s cost of capital more quickly than companies with moats will. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale. Fair Value Estimate Our analyst-driven fair value estimate is based primarily on Morningstar s proprietary three-stage discounted cash flow model. We also use a variety of supplementary fundamental methods to triangulate a company s worth, such as sum-of-the-parts, multiples, and yields, among others. We re looking well beyond next quarter to determine the cash-generating ability of a company s assets because we believe the market price of a security will migrate toward the firm s intrinsic value over time. Economic moats are not only an important sorting mechanism for quality in our framework, but the designation also directly contributes to our estimate of a company s intrinsic value through sustained excess returns on invested capital. Uncertainty Rating The Morningstar Uncertainty Rating demonstrates our assessment of a firm s cash flow predictability, or valuation risk. From this rating, we determine appropriate margins of safety: The higher the uncertainty, the wider the margin of safety around our fair value estimate before our recommendations are triggered. Our uncertainty ratings are low, medium, high, very high, and extreme. With each uncertainty rating is a corresponding set of price/fair value ratios that drive our recommendations: Lower price/fair value ratios (<1.0) lead to positive recommendations, while higher price/fair value Economic Moat COM PETITIVE FORCES WIDE NARROW NONE COMPANY PROFITABILITY Moat Sources: Intangible Assets Switching Costs Network Effect Cost Advantage Efficient Scale

7 Morningstar Equity Analyst Report Page 7 of 9 Morningstar Equity Research Methodology ratios (>1.0) lead to negative recommendations. In very rare cases, the fair value estimate for a firm is so unpredictable that a margin of safety cannot be properly estimated. For these firms, we use a rating of extreme. Very high and extreme uncertainty companies tend to have higher risk and volatility. Quantitatively Driven Valuations To complement our analysts work, we produce Quantitative Ratings for a much larger universe of companies. These ratings are generated by statistical models that are meant to divine the relationships between Morningstar s analyst-driven ratings and key financial data points. Consequently, our quantitative ratings are directly analogous to our analyst-driven ratings. Quantitative Fair Value Estimate (QFVE): The QFVE is analogous to Morningstar s fair value estimate for stocks. It represents the per-share value of the equity of a company. The QFVE is displayed in the same currency as the company s last close price. Valuation: The valuation is based on the ratio of a company s quantitative fair value estimate to its last close price. Quantitative Uncertainty: This rating describes our level of uncertainty about the accuracy of our quantitative fair value estimate. In this way it is analogous to Morningstar s fair value uncertainty ratings. Understanding Differences Between Analyst and Quantitative Valuations If our analyst-driven ratings did not sometimes differ from our quantitative ratings, there would be little value in producing both. Differences occur because our quantitative ratings are essentially a highly sophisticated analysis of the analyst-driven ratings of comparable companies. If a company is unique and has few comparable companies, the quantitative model will have more trouble assigning correct ratings, while an analyst will have an easier time recognizing the true characteristics of the company. On the other hand, the quantitative models incorporate new data efficiently and consistently. Empirically, we find quantitative ratings and analyst-driven ratings to be equally powerful predictors of future performance. When the analystdriven rating and the quantitative rating agree, we find the ratings to be much more predictive than when they differ. In this way, they provide an excellent second opinion for each other. When the ratings differ, it may be wise to follow the analyst s rating for a truly unique company with its own special situation, and follow the quantitative rating when a company has several reasonable comparable companies and relevant information is flowing at a rapid pace. Quantitative Economic Moat: The quantitative moat rating is analogous to Morningstar s analyst-driven economic moat rating in that both are meant to describe the strength of a firm s competitive position. Uncertainty Rating Price/Fair Value % 95% 135% 105% 110% 80% 90% 70% 155% 85% 115% 60% 175% 80% Low Medium High Very High Uncertainty Rating 125% 50% Q QQ QQQ QQQQ QQQQQ

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