Adairs: Still a lot to like
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 16 February 2021, 9:30 AM
- Sectors Covered:
- Consumer Discretionary (Retail)
- An exceptionally strong period of growth for Adairs (ASX:ADH) (NPAT +174%), even after the group’s decision to hand back its 1Q21 net JobKeeper benefit (a pragmatic approach and immaterial on a per share basis).
- We are encouraged by ADH’s confidence in its ability to retain a large portion of its recent GM gains (1H21 GM +650bp) and that Mocka looks set to be a much bigger business than original base case projections.
- We lift forecasts by 14% in FY21 and 3-6% thereafter to reflect a more bullish Mocka earnings outlook. Our FY22 forecast is 20% below FY21.
- Lack of clarity on how FY22 will pan out may keep a lid on ADH’s valuation in the short term (akin to all retailers), however the stock trades at a discount to most peers and we are confident earnings will normalise at a level materially higher than pre-COVID-19. We keep an Add rating with a new PT (login to view).
1H21 result – NPAT +174%
ADH’s 1H21 result was slightly (2-3%) above our EBIT/NPAT forecasts. However the decision to repay the net JobKeeper benefit received in 2Q21 (A$6.1m) to the Government saw underlying earnings come in below (we had factored it in).
Key result highlights: sales +35% (Adairs +20% + maiden 6-month contribution from Mocka); EBITDA +146%; NPAT +174%. GM strength within Adairs (+650bp) and Mocka (+230bp) impressed, while operating costs were lower than we expected in Mocka.
ADH exited 1H21 in a A$22m net cash position (A$15.9m normalised for JK repayment) and declared a 13cps dividend. Of note, the group added c100k recurring Linen Lover customers in the 6-month period.
Strong start to 2H21; no FY guidance as expected
Strong trading has continued into January, with ADH reporting group sales +25% (Adairs store LFLs +12.4%; Adairs online +66%; and Mocka +48.6%). This outcome was achieved despite a sub-optimal inventory position, which looks set to be fully resolved by end-February.
No FY21 guidance provided as expected given COVID-19-related uncertainties, although management did flag the group will cycle a period of national closures during 2H21 (Adairs sales were flat in 2H20).
ADH stated that it expects the heightened spending on home improvement/decoration to continue while COVID-19 uncertainty prevails. ADH’s new distribution centre (DC) has experienced slight delays due to COVID-19 but is still expected to be operational in 1Q21 (vs July previously) with annualised cost savings of A$3.5m pa reiterated.
Another round of upgrades
We have lifted our FY21 EPS forecasts by 14% and 3-6% thereafter with outer year upgrades largely reflecting more bullish assumptions around Mocka sales rates domestically and margins. In 2H21 we forecast 18% revenue growth and 51% EBIT growth. In FY22, we assume EBIT falls by 20%.
Add maintained; PT increased
ADH has been a major beneficiary of the domestic consumption tailwinds brought about by COVID-19 in 1H21. The group has executed well on product, attracted new customers and taken market share.
Retaining these new customers will be key for when demand ultimately normalises, although Mocka should provide continued strong growth in years to come. The enduring benefit of these tailwinds can be seen in ADH’s strong balance sheet, providing flexibility for additional growth avenues in time.
Add rating maintained; New PT (login to view). Based on our FY22 forecasts, ADH is trading on 10.8x and 6.4% yield.
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