Super Retail Group: Bushfire impact quantified
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 21 January 2020, 12:03 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
- SUL’s 1H20 trading update highlighted bushfire-related earnings pressure in BCF and, to a greater extent, Macpac. 1H EBIT c10% below our prior expectations.
- Setting these one-off impacts aside, there were some positives in the trading update: solid top-line growth in key SCA/Rebel businesses; 2Q GM stabilisation in SCA/BCF; and strong online sales growth (+22%).
- While a return to more normal trading patterns is inevitable, timing around an ‘outdoor’ recovery in general is uncertain. Hence, we have chosen to downgrade our FY21 forecasts (on top of FY20).
- In our recent report we flagged the short-term earnings risk associated with the bushfire events. We also flagged our preference to look through these largely oneoff events and highlighted SUL’s reasonable valuation. This thesis remains unchanged: ADD rating with a revised price target (Morgans clients can login to view detailed reports and price targets).
1H20 trading update – key trading period impacted by bushfires
SUL issued a 1H20 trading update, with December impacted by the recent tragic bushfires/drought. As expected, BCF and Macpac were hit hardest given their outdoor exposure, although the quantum of the impact was greater than expected. Group LFL sales growth was +1.7% in the half, but slowed to 0% in the Nov/Dec period (vs +3.2% in Jul-Oct). 1H20 LFL sales growth by division comprised: Auto +2.4% (vs +2.7% YTD at AGM); Rebel +3.3% (vs +3.1% at AGM); BCF -0.5% (vs +6.5% at AGM); and Macpac 7% (vs -2.1% at AGM). The above implies Nov/Dec LFL sales growth of -10.8% in BCF and -14% in Macpac. SUL has guided to 1H20 EBIT of A$113-115m (-8% on 1H19).
Macpac and BCF the key earnings drags vs our forecasts
Aside from opex deleverage in Nov/Dec, Macpac (EBIT margin -815bp) also suffered heavily from a decision to not pass on FX-related price increases in the Winter period (1Q20). This has since been rectified with a more normalised GM reported in 2Q20 as the price increases were implemented. Within BCF (EBIT margin -125bp), management noted that its GM had encouragingly stabilised in the 2Q. Auto/Rebel EBIT margins were down c50bp (higher GMs but offset by EBA impact and other labour investment + higher D&A). All in all, management were positive about the group’s ability to show an improved performance in the 2H. We see general outdoor conditions as a key risk.
Mapping out our forecasts
SUL’s February trading update is unlikely to show any meaningful reversal of recent topline trends. While some normalisation of trading will eventually return, the timing of an ‘outdoor’ recovery is uncertain. We now forecast FY20 EBIT of A$215m, which implies 2H EBIT declines by 2.2% (vs -8.4% in 1H20). This lower decline is largely due to SUL’s guidance that Macpac 2H20 EBIT will increase on 2H19. We assume less BCF margin decline in the 2H (vs 1H) given the GM stabilised in the 2Q and we assume some normalisation of trading in the 2H. We assume similar 2H20 margin decline vs 1H20 in SCA/Rebel as the EBA headwinds persist. Overall, we lower our EPS forecasts by 7.7%/5.9%/5.5% in FY20/FY21/FY22. Given the main cause of lower FY20 earnings should be one-off, we have potentially been too conservative with our outer year forecasts.
Investment view – ADD
In our recent report we flagged the short-term earnings risk associated with the recent bushfire events. From a medium-long term investment perspective, we are prepared to look through these largely one-off events. SUL is trading on 13.5/12.6x FY20/21F PE and a 4.8% FF dividend yield. ADD rating maintained with a revised price target (Morgans clients can login to view detailed reports and price targets).
Morgans clients can login to view our detailed report for Super Retail Group. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.
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