Super Retail Group – Supportive backdrop should play out for a while yet
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 04 August 2020, 5:00 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
- Super Retail Group (ASX:SUL) reported 27.7% group LFL sales growth in June.
- FY20 NPAT guidance of A$153-154m was 12% above our previous estimate and implies 12.6% growth in 2H20. This should see SUL exit FY20 in a very conservative net debt position.
- We think the recent tailwinds supporting SUL's sales can continue over the next 12 months, providing a highly supportive sales/earnings backdrop for the group.
- Valuation support (11x PE), category tailwinds and strong BS (admittedly supported by the recent equity raising) sees us maintain an Add rating (Morgans clients can login to view detailed reports and price targets).
LFLs boom in June
Super Retail Group (ASX:SUL) provided a FY20 trading update at guidance above our/consensus forecasts.
LFL sales growth accelerated strongly over June (+27.7%) with most businesses benefiting from domestic consumption tailwinds.
Divisional LFL sales growth: SCA +6.3% (+2.4%/+10% 1H/2H); Rebel +2.7% (+3.3%/+2.2% 1H/2H); BCF +3% (-0.5%/+6.5% 1H/2H) and Macpac -9.1% (-7%/-11% 1H/2H).
FY20 guidance metrics well above the street
SUL issued the following FY20 guidance: revenue A$2.82bn (+2.9%/+6% 1H/2H); EBITDA A$327-328m (-3.9%/+12.8% 1H/2H); EBIT A$235-236m (-7%/+15.8% 1H/2H); NPAT A$153-154m (-9%/+12.6% 1H/2H).
This guidance implies a FY20 EBITDA margin of 11.6% (-77bp/+77bp 1H/2H) and EBIT margin of 8.3% (-88bp/+76bp 1H/2H).
This margin uplift in the 2H likely reflects: strong trading/opex leverage in June; a more stringent focus on costs even in the wake of COVID; and rental waivers (although we don't expect this to be material given SUL's performance).
The strong end to the year will likely see SUL exit FY20 in a conservative net debt position (we forecast 0.2x EBITDA; although cash deferrals of tax/rent may boost this further short-term).
Mapping out our forecasts
We upgrade our forecasts to sit in line with guidance. Looking into FY21, we forecast 5.1% revenue growth, 5.5% EBITDA growth (noting an additional 6 months of the wage step-up flows through in FY21), 9.4% NPAT growth (net interest reduction due to the raising) and -4% EPS growth (raising dilution).
We assume SUL experiences strong 1H21 earnings growth, before reporting negative growth in 2H due to the strong base to cycle.
This said, we don't see SUL as having experienced a dramatic pull-forward of demand during COVID and the current tailwinds may well persist for another 12 months.
We continue to assume no final dividend is paid given the company only recently raised equity, however we note the company may well choose to do so given the stronger than expected earnings result.
Investment view – Add maintained
SUL's businesses look well placed to continue to benefit from some key thematics including: increased domestic tourism and leisure activities; home-based fitness; and a general acceleration in online consumption.
Our DCF/PE/SOTP valuation increases (Morgans clients can login to view detailed reports and price targets) - Add rating maintained.
Key risks: COVID-19 impacts; a slowdown in consumer spending; heightened competition; further margin compression; and a significant fall in the AUD.
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