Mosaic Brands: 1H21 trading update

About the author:

James Barker
Author name:
By James Barker
Job title:
Analyst
Date posted:
01 February 2021, 9:00 AM
Sectors Covered:
Retail, Technology and Telecommunications

  • Mosaic Brands (ASX:MOZ) provided a 1H21 trading update, with 1H21 underlying EBITDA expected to be $40-45m (+22-38% yoy). While LFL sales were -15%, LFL gross profit was -5.6% for the half. The result also benefited from JobKeeper subsidies and the implementation of a cost-out program.
  • MOZ ended the period with $65m of net cash ($110m cash; $45m debt), which was meaningfully improved on FY20 (although assisted by timing benefits).
  • While we believe MOZ offers value relative to retail peers, however given the significant operational restructure underway, we maintain a HOLD rating and update our target price (login to view).

1H21 trading update – ahead of expectations

MOZ provided a 1H21 trading update. Key points: sales of $322m (-22% yoy); online sales +31% to $54.8m; LFL sales -15%; and underlying EBITDA of $40-45m.

Given 1Q21 JobKeeper was $24m, we estimate that a similar amount was received in 2Q21, amounting to $48m for the half.

However, given MOZ’s VIC portfolio (~20% of footprint) was closed for ~3 months, we estimate ~50% of the JobKeeper amount was used to offset closures, with the remainder a net benefit to underlying EBITDA.

MOZ noted that it now holds ~50% less stock vs the pcp, which is expected to assist GMs going forward. MOZ noted that December saw a big improvement in sales momentum, with LFL sales -4%.

Balance sheet on the improve

MOZ ended the 1H with $65m net cash ($110m cash; $45m debt). This was a material improvement from the FY20 result (net cash $3.6m – incl. $74m of debt).

We note that 1H21-end is typically a seasonally strong point from a cash/BS perspective, with inventory paid for in the months after the key trading period.

We forecast net cash to reduce to ~$20m by FY21-end and look to more commentary around the balance sheet and net asset/liability position at the upcoming result.

No guidance provided; inventory ‘well positioned for the 2H’

MOZ did not provide guidance, however noted that it is ‘well positioned for the second half’. We forecast EBITDA of $43.1m for FY21 (vs $45m loss the pcp). We assume a break-even outcome in the second half, largely reflecting JobKeeper benefits ending at the end of 1H21.

MOZ did note that recent weeks (i.e. recent COVID-19 lockdowns in NSW/QLD/WA) highlight that navigating challenges (due to COVID-19) remain in the 2H.

Investment view – HOLD and revised price target

Given MOZ’s primary exposure to shopping centre foot traffic and an older demographic, its business has experienced significant disruption from COVID-19. We look to the upcoming result for further detail regarding the outlook for the business and balance sheet position.

While we believe MOZ offers value for investors with a higher-risk tolerance, we await further evidence of the turnaround initiatives underway before becoming more positive on the stock.

As a result, we maintain a HOLD rating and update our price target (login to view). Key risks: continued COVID-19 impacts including further lockdown restrictions; consumer confidence; competition; FX movements; and failure to renegotiate lease terms.

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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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