FY19 Portfolio update ASX:LBL, SOP, DEM, 2BE, XRF, BSL, SSG

04/09/2019

Trav Mays
Follow @MaysTrav 

Today I would like to give an update on all the stocks within my portfolio and see how my original thesis has/is playing out. I plan to write another post about other companies that aren’t in my portfolio but I have written about in the past to test my thesis and hopefully learn a bit more. 

I run a very concentrated portfolio because the benefits really resonate with me. I completely understand diversification and its merits, but I struggle to keep up with this many stocks, so adding another 13 or so to get diversified sounds like a nightmare, but each to their own. The figures in the table below are just a snap shot as of end of business day today (04/09/19) and should not be looked at as an indication of performance.

*Weighted average price

LaserBond (ASX:LBL)

I originally made a mistake with LaserBond, to ensure that I learn from it, I have given it its own post, so I won't rewrite that here. You can read all about my mistake here and the original here.

BlueScope Steel (ASX:BSL)

Original thesis can be read here

After going through my analysis I decided to sell BSL today (04/09/19) for $12.33, netting me a return of 11.6% + dividends - brokerage and tax in 9 months, pretty happy with that. The reason I decided to sell is due to increased uncertainty. The trade war continues to drag on, with steel being a key lever both sides are using to hurt the other. BSL has also been spending a lot of money on buybacks, helping to keep the stock price somewhat elevated despite the decrease in profit and predicted large decrease in FY20. If the buyback where to stop before the trade war ends, I would imagine it would hurt the share price in the short term. They have also just started proceedings with the ACCC over alleged steel price fixing. It doesn't sound like they have a very solid case, the ACCC's Chair Mr. Rod Sims stated that due to them only having 6 years to begin civil proceedings and that time is almost up, the "ACCC has determine it is appropriate to commence such proceedings against BlueScope and Mr. Ellis", not the most confident sounding reasoning, but adds to the uncertainty around BlueScope. Whilst I think it is still undervalued, I would rather wait and watch on the sidelines than continue to own a stock whose profits are so heavily tied to the a ongoing disagreement between two of the most powerful people on the planet and get back in if it does happen to go down. 

Synertec (ASX:SOP)

Original thesis can be read here

Synertec looks to be playing out as expected, albeit, slightly postponed, except for their revenue, I didn’t predict anywhere near that big a jump (111.2%). They also recorded decent increases further down the income statement, with EBITDA returning to positive figures that being said, they did produce a loss in FY19 of $85k.

The original thesis revolved around a new accounting standard (IFRS 15, introduced on the 1st January 2018) temporarily disguising earnings, which continues to be the case. We can see this by looking at the disconnect between operating cash and EBIT, EBIT for FY19 was a loss of $40k whilst Operating cash was a positive $0.83m. We can also see that despite SOP recording an EBIT loss in FY18 and FY19, cash and cash equivalents has continued to increase. If you have read my initial post, you would have seen the simple calculation process that reveals SOP's true earnings, which accounts for all but 50k of the 2.4m increase in the cash balance, as calculated at HY19. This hidden profit, I believed, would eventually be put through the income statement, boosting profit and would be the catalyst for a ~40% stock price gain. But despite the deferred income decreasing by $2.4m in FY19, SOP produced a loss, so what is going on? 

I believe the missing profit has been postponed due to some untimely project completion dates; $8.46m worth of projects plus a custody transfer skid were delivered within the first 2 months of FY20. Under IFRS 15, contracts with multiple performance obligations record revenue as each performance obligation is meet, contracts with payments upon completion are recorded "when control of the goods transfer to the customer". Whereas "operating expenses are recognised in profit or loss upon utilisation of the service or at the date of their origin". This means that whilst expenses are recorded as they occur, revenue is recorded only after a milestone is achieved, any cash received before the milestone is recorded as Deferred Income on the balance sheet under Liabilities. As the projects pass their milestones, the deferred income reduces as it is recognised as revenue. The final portion of the revenue both received as cash and recognised on the P&L for the projects finished early FY20, I believe, would have occurred on delivery in FY20, hence the lower deferred income and loss for FY19. While we are not given figures for the custody transfer skid or contract specifics, it's a good bet that they would be settled as cash on delivery, revenue would therefore be recorded in FY20, its costs however, would have all been recorded as they were incurred, the majority of which was in FY19. The same can be said for the performance obligation contracts, the final portion of the payment will be received in FY20, but a large portion of costs would have been expensed in FY19. The 238% increase in the materials and services expense and the 2H19 operating cash loss of $0.42m, I believe, help to validate this point.

Whilst a good portion of the revenue and profit disconnect can be attributed to the accounting standards and untimely completion dates, part is due to the revenue increase coming from the lower margined fixed priced project segments. This segment's revenue increased by 166%, making up 87.3% of total revenue, whilst their other division, rendering of services, decreased by 13%. It would appear that SOP is pricing their projects with a low margin to help win market share, allowing them to show off their skills and talent and to win customers over. Clearly there is a short window in which a strategy like this can be used, but if used correctly, can really help to boost long term shareholder value. 

SOP continued to invest in themselves during FY19, they in actual fact accelerated their spend, with business development more than doubling and Employee and Super costs increasing by $1.33m or 21%.

I believe SOP is still good value at current prices, they have no debt, are op cash positive and according to their investor presentation have a medium term target of $40m revenue, with above industry average margins. They seem to be focusing on their custody transfer skids as a large driver of growth, a little more sales info about these units, projected sales volume, a ball park sale price and margin would be appreciated. But nothing stood out as a worry for me, so I'm going to continue to hold. The 1H20 report is the one I am really interested in, within it will hopefully be a return to healthy margins and proof of my thesis playing out, bring with it the ~40% gain I'm predicting. Fingers crossed on this one, I do however believe the risk reward ratio is positively skewed in my favor. 

Shaver Shop (ASX:SSG)

Original thesis can be read here and the half year result here

Shaver Shop along with a number of other large retailers had a pretty good year. Despite the constant retail apocalypse discussions, SSG grew NPAT by 6%, they hit the lower end of their EBITDA guidance, 12.5m and increased their online sales by 30%, which contributed 12.6% to total sales. But more importantly, they grew LFL sales, 1.1% overall and 4.8% when you exclude Daigou sales.

Over the year they have made a number of improvements, they opened 6 new stores and bought back one franchise. They also improved their website, initiated a number of online incentives and completed 8 full store refits. 

Using the PEG ratio, SSG looks priced a little bit higher than it should be, currently sitting on a PEG of 1.5, when using FY19's earnings growth rate of 6% (P/E = 9.14), but is this level of growth justified? So far in FY20, they have increased LFL sales by 9.5% and bought back 2 franchises. Within FY20 they are planning on increasing their marketing spend back up to FY18 levels and refitting 5 - 10 stores with the new design. The franchise buy backs are especially important as they are typically in locations that generate higher sales per store. So they are definitely off to a good start to the year. So it does seem like 6% is a bit low, but it is far too early to tell, as with most retailers, so much of their revenue comes from the holiday season, that any prediction without a little bit of holiday data is pretty much pointless.

During the conference call, Mr. Cameron Fox, current CEO, made an interesting comment. He stated that SSG are using each store as a type of warehouse, whereby as an item is purchased online, the sale order is sent to the store nearest to the customers location, who then, during down periods, package and post the online sales. Clearly this is an excellent idea to try and reduce postage times and costs, keep employees busy during down times and to combat Amazon's 2 day delivery, but one that would need to be managed really well. 

Given all this, I am going to continue to hold and watch, they are paying out a pretty healthy dividend, so assuming everything stays the same or doesn't deteriorate too much and I don't have any other company I want to buy, I'm happy to hold.

De.mem (ASX:DEM)

Original thesis can be read here

DEM on the surface didn't have a very good half, revenue decreased by 37% (HY19 $3.7m) whilst their NPAT loss more than doubled (HY19 -$1.8m). But when we have a look a little further down in the report, at the cash flow statement, a different story emerges. DEM increased their receipts from customers by 9.3% (HY19 $5.08m) and whilst they produced a operating loss of $0.8m the vast majority of it, ~74%, was from the first quarter, showing that they are making progress towards becoming operating cash flow positive. Not only that, but DEM is predicting to surpass CY18's revenue of $10.5m, with $9.5m worth of revenue having already been secured.

Whilst all of this is great, my key take away from the report is that DEM has begun to untether themselves from the mining and infrastructure industries whilst expanding their geographical footprint. DEM states that "while the vast majority of CY 2018 revenues were generated from the mining/resources and infrastructure segments, the revenue mix for CY 2019 includes some contributions from projects in the food & beverage sector". They went on to state that "a key pillar of the expansion strategy for 2019 is to aggressively target the high growth food & beverage and agricultural sectors across Australia". DEM is also expanding their geographical footprint, having set up two new offices in Adelaide and Melbourne, they also acquired PumpTech (07/08/19), Tasmania's equivalent of Akwa-Worx. A recent announcement  really highlights these two points. DEM reported on the 28/08 that they had received two purchase orders for a total of $0.35m, the first order was for a water treatment system in WA, ordered by a WA government organisation, whereas the second order was for a waste water treatment system for a company working in the Food & Beverage industry based in the Pacific Islands region. Whilst the value is not very high, it shows that they are making further progress towards these two goals.

Nothing in the report stood out to me as a worrying sign. I believe DEM is still great value at today's prices and will be able to generate a shareholder return around the 30 - 40% mark in the not to distant future, with the potential for a lot more over the coming years if management performs well and they get a bit of luck on their side. To achieve this, I believe DEM will need to continue to ride the increasing infrastructure spend all the while investing the proceeds back into the business, helping to further expand their customer base industrially and geographically. Signs of DEM departing from this plan is what I will be looking for in the future, but as they currently stand, I am going to happily continue to hold.

TUBI (ASX:2BE)

Original thesis can be read here

Tubi performed really well over the year, they exceeded my revenue prediction by $4.5m, increasing year over year by 82%. They did however fall slightly short on my NPAT prediction, missing it by $0.17m. Their NPAT figure however includes a $0.95m listing expenses, when we adjust for this, EBIT increases to $3m (9.74% margin) and after we remove $0.92m of tax (30% tax rate), NPAT increases to $2.15m (6.8% margin), ~$0.5m higher than I had predicted.

The reason my prediction missed the mark by so much, was due to 2BE generating revenue per month far higher than they have in the past. Over the last 6 months of FY19, Tubi had one plant producing in the Permian Basin which generated $14.4m, or $2.4m per month. My estimate had been the average between the revenue received over the year in NZ and the 2 months in the Permian Basin, $1.65m per month. At the time I was aware that the 2 months in the Permian Basin figure I had used was conservative and would increase as the team became accustom to the factory and site, but I didn't expect that they would be able to increase it by $0.75m.

Along with missing the mark on the rev/month, I was also quite a way off on the sale price of the Iplex unit. Due to me underestimating the amount of revenue per month the plants would generate, I overestimated the cost of the Iplex plant, its actual cost was AUS$9.28m, of which, 40% has already been received with the remaining 60% to be received when the plant is delivered in  FY20.

This report gave us some more valuable information about potential future revenue, so I believe an update of my old projection is warranted. To keep the projection conservative, I won't update the assumptions, despite the fact that the plants are currently ahead of schedule, I will just update the rev/month figure, the Iplex plant sale price and use FY19's adjusted figures. FY20's revenue therefore consists of 18 months (1.5 plants) of production at the new higher rate plus the remaining 60% of the Iplex plant. Whereas FY21's revenue is for 4 plants producing for 12 months, 2 at the new higher rate $2.4/month and 2 at the more conservative lower rate of $1.65m/month. 

The updated information paints 2BE in even better light than my original post. If we look one year out, we have a PEG of 60.7, whereas if we average the next 2 years growth, we have a current PEG of 24.5. Very encouraging figures, especially when we consider that I have not taken into account the Iplex service agreement, the fact that the plants are currently slightly ahead of schedule and my conservative assumptions. I did however make a large amount of assumptions, so this prediction should be looked at with skeptic eyes, you can see how wrong I was last time I tried to predict. Given all this, I believe that the risk reward ratio is currently in my favor and at current prices, continues to offer good value. If you'd like to read more about Tubi, I have referenced and linked Mr. Joshua Baker's report on both XRF and Tubi at the bottom of the XRF section, he goes into more detail about their progress and is an excellent read, highly recommend.

XRF Scientific (ASX:XRF)

Original thesis can be read here

XRF had a bumper of year, having gone through an inflection point, they increased revenue by 20%, NPAT by 109% and Op cash flow by 380%. They also moved closer to turning the German office profitable, recording 2 months in the 2H19 with positive profit.   

Along with this, PBT margins were increased across the board, with the standout being precious metals increasing to 7% and contributing 25% of the total PBT, up from 3% in FY18.

Ricky (twitter:@galumay) has put forth a number of valid arguments against XRF on twitter over the last couple of months. The two that I believe could pose a serious threat are, the fusion machine's ability to process large quantities and their long life span. As a mine site ramps up production, no additional fusion machines are needed to meet the  higher level of output and with the replacement life cycle being so long, without new mines opening up, the sales growth rate within this segment could slow down or reverse. If we look at XRF's geographical revenue breakdown we can see that within Australia there was a large increase in the Capital Equipment segment, but flat in Consumables. We can lightly infer from this (consumables can be purchased from competitors) that a good portion of these purchases are replacements, which is also confirmed by XRF within the report. Higher commodity prices are currently pushing mining profits up, with the ABC reporting a 12.5% increase over FY18, so assuming this continues we should hopefully see capital equipment profit levels hold steady or slightly increase over the next 2 - 3 years (This is really a guess). XRF have also stated that they are focusing on growing the services and parts divisions and are planning to launch new products in FY20, opening up new organic growth opportunities.

Excerpt from XRF Scientific FY19 annual report

The consumables division did well, the continued reduction in Lithium prices helped to push NPAT to record levels, increasing by 35.3%, despite revenue increasing by only 6.16%. Expanding XRF's consumables market share is another area of growth XRF has stated they are targeting. 

As I said earlier, precious metals is the real stand out here, this division appears to be on the cusp of an inflection point and in my opinion is where the future growth will stem from. The German division's progress to becoming profitable has allowed XRF to reduce their precious metal expansion costs by half ($0.3m FY19, $0.743 FY18) and to increase profits to $0.925m, up from $0.556m in FY18.

So what does this mean for XRF? I believe XRF is well positioned to continue to benefit from the pickup in the mining industry, giving them a couple of years of similar or higher capital equipment revenue, this along with their decrease in precious metals expansion costs, higher margins and organic growth opportunities will help to push earning higher into the future. Hopefully, they will pump a good portion of this back into the company helping to expand their product mix through either acquisitions or product development.  They have stated that they are looking to expand internationally and that they are pursuing M&A opportunities, so this is looking promising. The rest will probably be distributed to share holders, as Mr. Joshua Baker states in his recent article "Results Update: Platinum Gilded Numbers & Close to Light at the End of the Tube", "I believe the company would be able to make a material capital return to investors via a special dividend, which would also allow XRF to distribute the benefit from the $5.7m in franking credits accrued on the balance sheet".

Given all this, I am happy to hold, but I will be watching for any signs of Ricky's fears playing out. I am however going to push my estimate of the share price up to $0.3, with the possibility of more if management perform well and they continue to have luck on their side.

As always, thanks a lot for reading. I am on Twitter Follow @MaysTrav and Linkedin  if you’d like to connect or would like to chat, it’s always great to meet other ASX investors, especially those who have a different view point and don't forget to subscribe to ensure you don't miss out on my new posts. 

Thanks for reading

Just Culture Investor

Trav Mays

Subscribe to Just Culture Investor by Email 

Sources:

1. https://www.livewiremarkets.com/wires/results-update-platinum-gilded-numbers-close-to-light-at-the-end-of-the-tube
2. https://www.abc.net.au/news/2019-09-02/gdp-economic-growth-slow-down-business-indicators-profit-mining/11471034

The author is a current owner of all shares outlined above, 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. Please refer to Disclaimer page for a full list of disclaimers.  

Soldiering on, Shaver Shop half year results (ASX:SSG)

10/03/2019

Trav Mays

Follow @MaysTrav 

Today we will be diving into Shaver Shop’s 2019 half year results, some good, some not so good, but if you’ve read my initial thesis, the results are as you’d expect, fairly average.

Before we begin, here is a refresher on Shaver Shop, click here.

HY Report

Shaver Shop has a mixed start to the fiscal year, they achieved a 7.7% increase in sales (ex. Daigou), with online sales increasing a further 10.6% (1H 2018 66.6%) to now form 12% of total sales. This sounds great, but then you continue on and see that they actually increased their store count to 113 (7 stores in 6 months) and their like for like store sales decreased by 5% (flat if you exclude Daigou re-sellers).

Another half year achievement was the increase in the gross margin of 1.3% to 42.7%, which is a total 5 year percentage change of 3%, very impressive considering how much Shaver Shop has expanded over those years and the reduced Aussie dollar. Unfortunately, whilst they may be having success in reducing cost of goods sold, their other expenses are increasing disproportionately to revenue. As you look down the margin table below, you can see that all of the other margins are decreasing year on year, with Net Profit After Tax (NPAT) decreasing 1% pcp, taking the total 5 year percentage change to -32.7%.

When we breakdown the expenses and calculate them as a percentage of total revenue, the increasing culprits are, employee wages, 2.1%, occupancy, .5%, and other expenses, 1.2%. Marketing continues to be the area Shaver Shop is targeting their cost cutting, reducing by another 1.2% pcp (just over a $1mill) and halving over the last 5 years.

Shaver Shop stated in their conference call, that they are moving away from the more traditional and expensive advertising mediums (television, print, etc.), towards the cheaper online marketing campaigns, which can explain some of the reduction in their marketing spend. I understand their desire to reduce this expense, it’s an easy one to reduce with little revenue impact over the short term (it does help their margins as well), but as competition increases, they need to be differentiating themselves from other companies, especially online, such as Amazon. Why would a customer choose to go to their website, what advantage do they offer in this space? In store is a different story, they have a consistently high Net Promoter Score (NPS), but as customers are becoming more sophisticated, many doing their own research before even setting foot in the store, this competitive advantage will be eroded away. Consumers are obviously moving towards online, Shaver Shop can see this move and are therefore promoting online more, but again, what can they offer a potential customer that Amazon or another big retailer can’t, a bigger discount? Fast delivery (Good luck beating Amazon on this one)? A simple to use website, with a streamlined purchase process and a limited number of purchase pain points? None of these or others I can think off gives Shaver Shop any advantage over other online websites, in my opinion they have no online competitive advantage.

Evaluation

The reject shop on a number of metrics, see below, is trading at historical lows, making it appear to be a good buy. Interestingly, the trend over the years has been downward, this means when looking at the numbers alone, there has never been a better time to buy Shaver Shop.

On a historical 7 year Enterprise multiple, shaver shop appears to have ~19.8% upside potential, which when added to the ~10% dividend yield, is a pretty healthy return.

As I believe Shaver Shop has become a dividend stock, with little chance of future growth, I have also included the Gordon Growth Model in this evaluation. For those unfamiliar with the Gordon Growth Model, it is a simple formula for evaluating the price of a stock using its dividend and the potential shareholders required return. It does however have a number of large limitations, it assumes the growth rate goes on forever, that a potential shareholders rate of return doesn’t change over time and doesn’t take into account the time value of money. There are more complex versions which overcome some of these limitations, but if you keep them in mind, it works as a quick and easy evaluation technique.

As you can see below, assuming that Shaver Shop continues to payout a $.024 dividend in the second half and using growth rates of 5 (roughly the dividend growth rate over the last 2 years) and 3 percent, we calculate a share prices offering a 65 and 29 percent increase on today’s values. Quite encouraging, but are these growth rates achievable over the long run? When doing the final overview of the evaluation results, I wouldn’t put too much weight on this one. 

Using Shaver Shop’s FY2019 EBITDA guidance and the historical NPAT/EBITDA ratio, we can calculate possible EPS for FY2019 and using this, see what P/E the share is currently trading at. Below you can see that assuming we have no large hiccups, Shaver Shop is currently trading at between a 5.5 and 7.5 P/E ratio, quite low, but in my opinion not too far off where I would expect them to be.

Discussion

Using historical references, Shaver Shop is currently looking cheap, but with the limited growth opportunity available, it appears about right. They did look at an acquisition over the half, rumoured to be Hairhouse Warehouse, which after costing them $1mill in due diligence, they decided against it. I’m sure that they made the right choice, but instead of looking for further growth opportunities, they have decided to increase the dividend payout ratio and suspend share buybacks (Somewhat contrarian to other companies willing to buy back their stock at any price, but further cements my opinion that they are currently priced roughly right). During the conference call, an investor asked if they would be looking at other potential acquisitions, with Shaver Shop stating (not exact quote) that if a very obvious buy hit them in the face, they would obviously purchase, but they are not currently looking. Which is a shame, a growth plan (along with the increase in stores) would be great, even if it isn’t an acquisition, maybe something like focusing on expanding into NZ market more could be a good option. Anything would be good, they are nearing the top of the number of stores Australia can handle, having already started to talk about store cannibalisation (the close proximity of stores, moves sales from one store to another). Obviously this is something all retail companies need to worry about, but I didn’t think this would be something they needed to worry too much about this far away from their goal of 145 stores.

The real question is what is Shaver Shops competitive advantage (moat)? In store they have excellent customer service. But as many customers are doing their own research before entering the store, for a large number of customers, the store is just the place they purchase the product they had already mentally purchased before setting foot in store. The future is online and here I really struggle to see what they can offer over other online stores, especially ones without brick and mortar stores, with low fixed costs and therefore larger margins. For a long time to come, there will always be people who enjoy the brick and mortar experience, but as this number is dwindling, so too will Shaver Shop’s advantage.

Conclusion

Shaver Shop on the face of it looks like a screaming buy, but when you step back from the numbers and look at the whole landscape I believe that they are priced about right. They are an excellent dividend stock, having increased their payout ratio of cash NPAT from 50% to between 60 – 80%, but with little growth opportunities and the decrease in available funds, I believe they will continue to shoulder on, paying out a great dividend over the short to medium term, until they can’t anymore.

If you would like to read another retail HY report, check out my recent Cellnet article here. I am on Twitter Follow @MaysTrav and Linkedin  if you’d like to connect, feel free to send me a msg, it’s always great to meet other ASX investors, especially those who have a different view point.

Thanks for reading

Just Culture Investor

Trav Mays

Subscribe to Just Culture Investor by Email 

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  

Does Shaver shop offer value? (ASX:SSG)

06/01/2019

Trav Mays

Follow @MaysTrav 

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 5^th and 6^th respectively. Shaver Shop’s DEBT/Equity score was a respectable 19%, ranking 4^th 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

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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  

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