Adairs Limited

Company Overview: Adairs Limited (ASX: ADH) is an omni-channel specialty retailer that offers homewares, furniture, and home furnishings through both retail stores and online channels. The company’s operating segments include Adairs and Mocka. Adairs is mainly involved in the retailing of home furnishings in Australia and New Zealand. The Mocka is a vertically integrated, pure-play online home and living products designer and retailer, which operates in Australia and New Zealand.

ADH Details

2021 AGM Highlights: On 20 October 2021, Adairs Limited (ASX: ADH) held its 2021 Annual General Meeting (AGM), wherein the management highlighted that the company has achieved exceptional sales and profitability growth across both Adairs and Mocka brands during FY21. The management also provided updates on other business aspects and notified about the initiatives it has taken to further improve its performance.   

• Digital Transformation Strategy: ADH is now focused on improving its digital platform to enable a more seamless omni-channel customer experience.
• Increase In Omni-Channel Conversion: At the AGM, the management highlighted about the increase in multi-channel shoppers and informed that more customers were comfortable shopping across both online and in-store channels than ever before.
• New National Distribution Centre Update: The company’s new National Distribution Centre (NDC) is now operating, and it is expected to deliver profitable growth for the next decade.

FY21 Results Highlights:

• Improved Group Sales: Despite the challenges caused by the COVID-19 pandemic, the company reported 28.5% YoY growth in its group sales to $499.8 million in FY21, driven by the decent performance across both Adairs and Mocka brands. Notably, Mocka reported total sales of $60.2 million, up ~30.9% on FY20. Total store sales for Adairs were up ~18.1% for the year or ~7.4% on a like-for-like basis.
• Increase in Underlying EBIT: Underlying EBIT for FY21 stood at $109.1 million, up ~97.3% on the previous year, reflecting disciplined cost management and decent gross margin.
• Growth in NPAT and EPS Statutory NPAT for FY21 stood at $63.7 million, up 80.7% on FY20. EPS for FY21 stood at 37.7 cents per share, up 79.1% on FY20.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Decent Dividend History: ADH has a decent track record of rewarding shareholders through dividends. From 2017 to 2021, the company’s dividend has grown at a CAGR of ~30.21%. For H2FY21, the company has paid a final fully franked dividend of 10.0 cents per share, taking the total full year dividend of 23.0 cents per share, significantly up from the dividend of 11 cents paid in FY20. At a CMP of $3.66, the company’s annual dividend yield stood at 6.26%.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 60.7%, up from 57.1% in FY20. EBITDA margin for FY21 stood at 60.7%, up from 57.1%. ROE for FY21 stood at 41.8%, up from 27.3% in FY20, reflecting the company’s improving returns. Current ratio for FY21 stood at 0.67x, down from 0.82x in FY20. Cash cycle for FY21 stood at 68.7 days, down from 96.3 days in FY20.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 21.70% of the total shareholding, while the top four constitute the maximum holding. Vinva Investment Management Limited and Challenger Managed Investments Ltd. are holding a maximum stake in the company at 4.90% and 4.87%, respectively, as also highlighted in the chart below:       

(Source: Analysis by Kalkine Group)

Trading Update: For the 16 weeks ending 17 October 2021, ADH reported 8.5% YoY decline in year-to-date total group sales but reported 8.2% growth on a like-for-like basis. The online sales of Adairs were 15% higher than FY21 and 172.8% higher than FY20. Total Adairs (like-for-like) sales were 4.5% higher than FY21. In the update, the company informed that the majority of NSW stores have re-opened on 11 October 2021. Further, the Victorian metro stores are expected to reopen in early November.

Key Risks:

• COVID-19 Uncertainties: The company is exposed to the risks related to the COVID-19 challenges, including government-mandated store closures, vaccination requirements, etc.
• Supply Chain Disruption: Due to the global supply chain conditions, the freight and other sourcing costs have increased, which is placing additional downward pressure on gross margins.

Outlook: Looking ahead, the company expects to benefit from pent up demand as stores re-open in Victoria, the ACT and Auckland. In order to position the business for successful Christmas trading, the company has taken steps to ensure that it has adequate stock levels.

ADH expects its member retention initiatives and the facilitation of online sign-ups to offer significant upside to existing growth rates. Further, the company believes that the growing store floor space through new and up-sized stores will help in driving store sales. For FY22, the company expects its capital expenditure to be in the range of $10-$15 million, reflecting expenditure on new store openings, completion of the National Distribution Centre, and ongoing digital initiatives.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has corrected by 19.99% and is trading lower than the average 52-week price level band of $3.04 - $4.97.  The stock has been valued using EV/Sales multiple based illustrative relative valuation method and has arrived at a target price of a low double-digit upside (in % terms). The company can trade at a slight discount to its peers, considering the challenges associated with the COVID-19 pandemic, including government mandated store closures, vaccination requirements, etc. For the purpose of valuation, peers such as Lovisa Holdings Ltd (ASX: LOV), City Chic Collective Ltd (ASX: CCX), Super Retail Group Ltd (ASX: SUL) have been considered, which comes under speciality retail space. Considering the company’s improving top-line and bottom-line, reopening of stores, expected benefits of member retention initiatives and the facilitation of online sign-ups, current trading levels, valuation, and associated key risks, we give a “Speculative Buy” rating on the stock at the current market price of $3.660, as on 28 October 2021, 1:30 PM (GMT+10), Sydney, Eastern Australia).

ADH Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

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Disclaimer

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