Super Retail Group: Will bushfires crimp short-term earnings?

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
16 January 2020, 3:00 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • We highlight a potential indirect, short-term impact from the recent tragic Australian bushfires on SUL’s earnings/trading update.
  • Clearly BCF is most at risk, particularly in NSW/VIC, although the business’ heavy weighting to northern QLD may buffer any impact. BCF contributed just 12% of SUL’s EBITDA in FY19. We also see risk to BCF margins given the competitive intensity we saw in this category over the key trading period. 
  • Macpac is also likely to have suffered given its outdoor exposure. We forecast this business to contribute just 6% of group EBITDA in FY19.   
  • Putting the above into context, if we say BCF/Macpac earnings came in 20% below our current forecast, this would result in only a 4% miss to group EBITDA. 
  • The remaining businesses may also have suffered some mild impact from store closures/lower sentiment/air quality in affected regions (although Rebel has a metro bias; and SCA should be reasonably resilient/defensive).   
  • The above said, any such impact is outside SUL’s control and will not persist infinitum (in fact, it will just push into FY21). We therefore highlight the short-term risk, but are prepared to look through this from an investment perspective. 
  • Setting these events aside, we continue to like SUL for its valuation/yield support, strong brands in growth categories and capital light/low risk strategy from the new CEO. Add rating maintained.

BCF and Macpac most exposed – but contribute c18% of EBITDA 

BCF has 136 stores in Australia with c38 in NSW, c25 in VIC, c45 in QLD, c19 in WA, 10 in SA and 2 in NT. BCF’s heavy north QLD presence may buffer any material negative impact given this region has largely escaped the fires.

The potential impact to the business from the bushfires could involve store closures in affected areas (we noted only 2 store closures during the period) and lower store demand (air quality/general sentiment) in stores nearby.

BCF contributed just 12% of SUL’s EBITDA in FY19, so we are cautious of potentially over-stating any potential impact.

BCF is heavily reliant on the key Christmas trading period.

We also highlight Macpac as a potential earnings risk given the nature of the product/customer. However, Macpac is also a relatively small earnings contributor (we forecast c6% in FY20).

If we were to say that SUL’s BCF/Macpac earnings were 20% below our forecast, this would result in only a 3.5-4% hit to group EBITDA – and push into the following FY. 

We lower our forecasts by 2% 

We have lowered our forecasts by c2%, which largely reflects taking a more conservative view on margins, particularly within BCF.

We forecast 1H20 EBIT of A$126.8m (+1.9%) and NPAT of A$82.1m (+0.6%).  

Potential for some short-term volatility; but Add maintained 

While we acknowledge there is short-term earnings risk, any impact cannot be capitalised and therefore we are prepared to look through this from a valuation perspective.

We maintain an Add rating.

Key risks include:

  • a slowdown in consumer spending
  • heightened competition
  • further margin compression
  • a significant fall in the AUD
  • execution risk surrounding Rays/Macpac transition.

 Upside risk: little to no negative impact from the bushfires. 

More information

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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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