Universal Store Holdings: More growth in store

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
13 January 2021, 11:00 AM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • Universal Store Holdings (ASX:UNI) has seen a very strong resurgence of demand/sales in the wake of COVID-19 as restrictions eased (1H21 sales +24%).
  • A higher GM and elevated opex leverage has seen EBIT lift c65% yoy, an incredibly strong period of growth despite VIC lockdowns and continued restrictions on youth events like festivals.
  • UNI will cycle a weak 2H20 as peak COVID-19 materially impacted the group (even after including JobKeeper).
  • We make 12-20% EPS upgrades following today’s update. Our new 2H21 EBIT estimate, while +125% yoy, still looks conservative given it implies a 1H/2H earnings skew of 73/27% and is well less than half 1H21 EBIT/month (excluding JobKeeper).
  • We forecast a 3-year EPS CAGR (FY20A-FY23F) of 30% (skewed to FY21/FY23). Trading on c14x FY21F, annualised 4.7% yield and with earnings risk still firmly to the upside; Add rating maintained. Our target price lifts (login to view target price).

1H21 trading update – EBIT up 61-67% yoy

UNI has provided a 1H21 trading update. Revenue of A$118m (+24% yoy) was driven by 26.5% LFL sales growth.

Gross margins have improved yoy, while EBIT is expected to be A$30-31m (+61-67% yoy), reflecting both GM expansion and material opex leverage on this top-line outcome.

We note that the EBIT guidance includes JobKeeper, which we had already assumed in our forecasts (cA$3m net benefit). A big period of growth for the group, reflecting strong trading out of peak disruptions caused by COVID-19 and despite continued impacts from VIC over the half.

Strong top-line implied over 2Q21

As part of its prospectus, UNI provided detailed 1Q21 forecasts. Based on our analysis, 2Q21 revenue growth was +29.2% (vs 16.5% in 1Q); while EBIT growth was 49.7% (vs 100% in 1Q21) with JobKeeper ceasing at 1Q21-end.

This implies c65% of EBIT was made in the 2Q of 1H21, with Christmas a key trading period for the group.

Mapping out our forecasts

As a reminder, UNI’s historical seasonality has been ~54/46% at revenue. While seasonality at an earnings level was not disclosed in the prospects, we expect the skew is higher at this level.

The growth guidance implies UNI delivered cA$5m of EBIT in 2H20 (materially impacted by COVID-19) vs cA$18m in 1H20 (77/33% 1H/2H skew – although not
a relevant measure given COVID-19 impact). UNI therefore has a very weak base to cycle in 2H21.

We now forecast FY21 EBIT of A$42.5m, which implies c80% growth yoy and 125% growth in the 2H.

Our FY21 EBIT forecast implies a 1H/2H EBIT skew of 73%/27%. It also implies 1H21 EBIT/month (excluding JobKeeper) of A$4.7m falls to A$1.9m/month in 2H21 – so a potentially highly conservative assumption.

ADD maintained; target price lifts

We make 12-20% EPS upgrades across forecast years which sees our DCF/PE target price increase from A$6.05 (login to view target price).

UNI was net negatively impacted by COVID-19 in 2H20 (including JobKeeper benefit) and we therefore still consider the stock to be somewhat of a COVID-19 exit trade. UNI is still ‘young’ in terms of brand awareness and store footprint, leaving meaningful upside for incoming investors.

Based on our forecasts, UNI is trading on 14x FY21F; annualised yield of c4.7%. We think the group can sustain a 15x+ multiple based on a superior growth profile with multiple levers, strong cash generation/balance sheet.

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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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