Does Shaver shop offer value? (ASX:SSG)
06/01/2019
Trav Mays
Follow @MaysTrav
*Updated on the 10/01/2019, I mistakenly entered the wrong EBIT for the reject shop, updated comparison image and corresponding sentences.
Image Source: http://investors.shavershop.com.au/Investors/
The recent large decline of the ASX, especially within the
retail sector, could provide an opportunity to purchase excellent companies at
bargain prices. Today we will be evaluating Shaver Shop, the speciality grooming
retailer, to try and determine if they offer value.
Description
Shaver Shop (ASX:SSG) is a 30
year old speciality retailer, who up until recently focused primarily on male
grooming products but have expanded their product offering to include
female products as well. This move towards targeting female customers, while
some might say a little late, is especially important for Shaver Shop, as a
large percentage of their customers have traditionally been women purchasing
for men.
Shaver Shop IPO’d (Initial Public
Offering) on the ASX in 2016 with a plan to move away from the franchise model
and with a goal to expand to a total of 145 stores. As you can see below, in
2013, of the total 72 stores, 80% were franchised, whereas of FY2018, they have
expanded to a total of 115 stores, 92% of which are owned by Shaver Shop.
Along with their expansion of brick
and mortar stores, Shaver Shop has been increasing their online store presence.
The results of which saw a FY2018 increase in online sales of 45%, 10% of total
revenue. Whilst their online presence is increasing, their total Like for Like
(L4L) store sales growth has been decreasing. Shaver Shop has attributed this
decrease to a reduction in Daigou (Surrogate Chinese purchasers, who ship
products that are unavailable in China to China to then be sold on) sales, when
excluding their Daigou sales, they have actually increased their L4L sales
quarter by quarter. It is this number that should be focused on, Daigou sales
can be sporadic and unpredictable and therefore should be seen as a bonus to
revenue when evaluating businesses, not as repeat or ongoing business.
Evaluation
Comparison
Ranking the large players in the
retail industry using traditional value metrics has the Shaver Shop ranked
second behind The Reject Shop. A quick look at the most common metric’s formula
reveals why this is the case. As with most of the metrics, PE has the price as
the numerator, Price/Earnings, therefore a reduction in
the price has a large impact on the PE value. The PE for both the Shaver Shop
and the Reject Shop are a lot lower than the rest of the retail companies
listed below, average retail PE was 10.98 in FY2018, this means that the value
metrics should be used with caution. The underlying reason for the
disproportionate reduction in Shaver Shop’s share price compared to the
industry average needs to be investigated thoroughly, before a conclusion can
be drawn. The Dividend Yield is quite high, again this is related to the price of
the share (Dividend yield = Dividend / Price) so it should be compared with
caution as well.
Other evaluation metrics such as
the Pitroski score and the Z-score which are not affected by price offer more insights
at this stage of the evaluation. Shaver Shop’s Pitroski score was equal second in FY2018, showing that as a business, Shaver Shop has improved over the year,
scoring 6 out of a possible 9. Shaver Shop’s Z–Score is however the lowest,
whilst it is still above the recommended safe zone of 2.6, be it slightly, it’s
well below its peers. Other comparisons within the list are the profit and
gross margin where Shaver Shop scored 5th and 6th
respectively. Shaver Shop’s DEBT/Equity score was a respectable 19%, ranking 4th
amongst its peers. This score in my opinion sums up Shaver Shop as a business
perfectly, average. The real question is, is average good enough, especially
given current economic conditions and with increasing competition?
Future Earnings
A quick and dirty way to estimate
next year’s earnings is to multiply the historical average NPAT (Net Profit After
Tax) to EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation)
margin (NPAT/EBITDA) with that of the recently confirmed FY2019 EBITDA
guidance. I have excluded 2015 from the average due to the misleading result
this outlier will create. As you can see on the table below, the average NPAT -
EBITDA margin was 56%. Multiplying this value with the Low and High EBITDA
guidance of $12 and $14.5mill results in an EPS (Earnings Per Share) of $0.055
and $0.066 respectively (For those who disagree with removing 2015’s value, the
average increases to 65% with a Low and High EPS of $0.062 & $0.072).
Another quick way to value Shaver Shops’ 2019 EPS is by
calculating the historical NPAT per store and then multiplying this by the FY2019
guide. For this analysis I have again excluded 2015’s results from the average,
helping to mitigate any one off effects.
Both the low guidance of 112 and
high guidance of 116 stores gives a figure around the lower end of the analysis
calculated above, helping to validate these results and stressing the need to
put more emphasis on the lower EPS (including 2015 increases the average to
$0.061mill/store and the Low and High EPS’s to $0.062 & $0.072). As I have
a conservative nature when investing, I will typically use the lower end of the
analysis when making final decisions, that way, if the 2019FY result ends up
being towards the higher end, then it is all an additional gain. When doing
this however, it is paramount that the analysis doesn’t have too many or too
high a safety margin, conservative is key, but over conservative results in
unrealistic and useless forecasts.
Within the table above, I have
also included their long term goal of 145 stores within Australia and New
Zealand. Using the analysis outlined in the previous paragraph and assuming
everything stays equal, Shaver Shop will have an EPS in the range of $0.063
when they have reached this goal. I have assumed 2 franchise stores at this
point, the makeup of the 145 stores is however irrelevant, the total is all
that matters for this calculation. It is also worth noting, that as this
analysis uses NPAT which includes online sales as well, as online sales
increase, assuming the shift from in store to online isn’t the cause for all
of the online growth, will cause the average NPAT/store to increase further.
Therefore the $0.063 is somewhat conservative, but given the unknowns and
increased competition from both online and actual stores, I believe it offers a
value that is approximately right.
Share Price
In calculating the share price
below, I have again used a quick and dirty method, whereby I use average PE
ratios to calculate the potential share price. To calculate the compounded
annual growth rate, I have assumed Shaver Shop will grow by a slower rate than
historically, 6 stores per year as opposed to the historical average of 9. The
reason for this is due to the possibility of a reduction in revenue over the
coming years, failed stores and the increasing difficulty of finding suitable
locations. At a rate of 6 per year, it will take 4 years to increase their
number of stores from 112 to 145.
To calculate the share price I have
used the current average PE of the companies listed above (9.52) and Shaver
Shops’ 4 year trailing PE (10.07), which when multiplied with the 2023 EPS of
$0.063, results in a share price of $0.60 and $0.64. Keep in mind that Shaver
Shops’ 4 year trailing PE is heavily influenced by 2016’s PE of 16.39, removing
this from the average, brings the PE down to 7.97 and a share price of $0.50. If
the share price does increase to $0.50 in 2023, that would result in a total
gain of 35.14% or a compounded annual growth rate of 6.21%. If however the
share price increases to $0.60 it would result in a total gain of 62% or a
10.15% compounded annual growth rate. The higher gain would require that Shaver
Shops’ PE ratio to increase to levels equal to the other companies within the
industry. One of the main requirements for this would be sustainable and
constant dividend.
Dividend
Shaver shop paid out a dividend
of $0.042 in 2018 a 5% increase on 2017 levels. This required a payout ratio of
79%, 9% higher than the 2017 and 2018 industry averages. The payout ratio
calculates the percentage of NPAT paid out in dividends, in other words, 79% of
Shaver Shops’ 2018 profit was paid to the shareholders in the form of
dividends.
If Shaver Shop chooses to
continue the 5% dividend increase in 2019, they will need to increase the
dividend to $0.0441 and assuming the estimated EPS stated above are correct
(EPS .054 & .063), would require a payout ratio of between 82% and 70%.
Whilst a payout ratio of 82% is not unprecedented, it is far from sustainable;
Shaver Shop will therefore need to either increase earnings or reduced expenses
to continue the trend further. Failing this, the long term dividend will need
to reduce to average levels, freeing up ample cash for Shaver Shop to spend on
growth opportunities, buybacks etc. If Shaver shop was to reduce the payout
ratio to 70% in 2019, using the range of EPS of .054 - .063 will result in a
dividend between $0.0378 and $0.0441. A dividend of $0.0378 at today’s prices
is still an extremely high 10.35% dividend yield and a fact we should keep in
our minds when making our final decision.
Discussion
It’s my belief that Shaver Shop
will achieve an EPS towards the lower end of the calculated values. This will
put a lot of downward pressure on the dividend, I don’t believe they will
necessarily lower it in 2019, especially given the huge sell off seen recently
when other companies have done it, Telstra for example. They will however need
to reduce it in the future if they are unable to increase sales or reduce their
expenses.
Shaver Shop has been reducing
their business expenses over the last 6 years, the majority of which has come
from the marketing and advertising, see below. They are also decreasing their
cost of sales, predicting a gross margin of between 42 – 42.5% as opposed to
2018’s gross margin of 41.4%. As Shaver Shop expands, their purchasing power
will increase, allowing them to further decrease their expenses, however as
their expenses as a percentage of revenue are similar to their competitors, the
difficultly of reducing them further will increase disproportionally.
Shaver Shop therefore will need
to increase their revenue and this, I believe, is the reason for their low
share price. Similar to Cellnet (read more about that here) and the rest of the retail industry,
shaver shop is feeling the pressure from a range of sources, an aging bull
market, low AUS/US exchange rate, low household savings rates, low wage growth,
high household debt, house prices falling sharply (mostly in the east coast
capitals), reduced Chinese demand for Australian resources and online behemoths
such as Amazon, Alibaba etc are all having an effect on Shaver Shop. How will
they fair when Amazon really starts to attack the Australian market is anyone’s
guess. Australian retailers do however have the added advantage of seeing Amazon’s
effect on America and other countries. Many, including Shaver Shop, have been
expanding their online presence helping to mitigate Amazon’s affect, this along
with the well run business of Shaver Shop, will help them to weather the storm.
Recommendation
In doing this analysis, I have
employed more crude analysis techniques allowing me to complete the evaluation
rather quickly. Whilst they may be crude, I believe the results are in the ball
park and as Warren Buffet says “It’s better to be approximately right, than
completely wrong”.
Whilst Shaver Shop has increasing
L4L sales growth and are well positioned to weather Amazon and others, the
combination of the uncertainties stated above will likely result in a reduction
in growth of future earnings. The calculated 2023 EPS of $0.063 is in my
opinion, approximately right, which achieves a total gain, not including gains
from future dividends and buybacks, of 35.14% or a compounded annual growth rate
of 6.21%. The high dividend yield even if Shaver Shop lowers their payout ratio
to 70% is definitely a positive, especially when calculating potential total
returns. I do however believe they are nearing the top of their growth potential and a
large percentage of any future gains will arise from dividends and buybacks as
opposed to share price movements, unless they diversify and grow through acquisitions, similar to Cellnet. Shaver Shop therefore could offer adequate return,
depending on the investor’s personal belief in the likelihood of this analysis
and when compared against other possible returns in alternative investments.
*Updated on the 10/01/2019, I mistakenly entered the wrong EBIT for the reject shop, updated comparison image and corresponding sentences.
Image Source: http://investors.shavershop.com.au/Investors/
Thanks for reading
Just Culture Investor
Trav Mays
The author is a current owner of a portion of Shaver Shop, given this, they may be subject to one or a number of biases, more specifically anchoring and/or confirmation bias. This article is neither general nor personal advice and in no way constitutes specific or individual advice. The website and author do not guarantee, and accept no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of any material contained on this website or on any linked site. This website is not a substitute for independent professional advice and users should obtain any appropriate professional advice relevant to their particular circumstances. The material on this website may include the views or recommendations of third parties, which do not necessarily reflect the views of the website or author, or indicate its commitment to a particular course of action
Location:
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