Super Retail Group: Unscathed, debt sorted and supportive backdrop

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
16 June 2020, 10:15 AM
Sectors Covered:
Consumer Discretionary (Retail)

  • Super Retail Group (ASX: SUL) escaped the COVID-19 pandemic reasonably unscathed, with LFL sales growth -1.7% over April/May despite Supercheap Auto and Macpac NZ store closures.
  • An ability to control its cost to serve online was a highlight of the update, despite the significant growth experienced.
  • The A$203m equity raise materially bolsters the balance sheet and enables SUL to continue to invest in its overall omni-channel capability – its key growth driver.
  • Short interest in SUL is c10% (15% of the free float). The company looks set to benefit from a likely increase in domestic tourism and leisure activities, home-based fitness and general acceleration in online consumption.
  • We think the bolstering of the balance sheet can offset the hefty dilution from the equity raising in terms of the group's overall rating. We think any business that can trade through this global event relatively unscathed will attract a higher multiple in its wake. Upgrade to Add rating (Morgans clients can login to view detailed reports and price targets).

Trading update – comes through COVID relatively unscathed

Super Retail Group (SUL) provided a trading update for the last eight weeks (weeks 39-47), reporting LFL sales -26% in April and +26.5% in May (net -1.7% over the period).

In terms of divisional LFLs: Auto +3.7%; Rebel -2.3%; BCF -0.7%; and Macpac -38.8%. Macpac was more materially affected by NZ lock-down restrictions (stores fully closed for five weeks).

As expected, online sales surged across the group and represented 18% of sales over the past two months while cost per unit actually reduced. GMs have been impacted by some shift in mix and increased online sales (-20bps YTD vs 1H20) while CODB as a % of sales was flat compared to 1H20.

May 2020 inventory fell by A$65m reflecting conservative ordering and a strong May trading outcome – but poses a risk to trading in coming months.

A$203m equity raise to reduce debt and enable digital investment

SUL announced an under-written accelerated pro-rata non-renounceable entitlement offer to raise A$203m at A$7.19ps. This equates to 28.2m shares and 14.3% of new issued capital.

Proceeds will allow the group to ramp capex back up to cA$90m pa (regardless of consumer conditions) comprising:

  1. Digital/omni-channel
  2. Supply chain investment to support digital growth
  3. Investment in working capital (strength in some categories and supplier promotional activity)
  4. Investment in store footprint optimisation

1H20 net debt of A$252m falls to a pro-forma level of A$54m (0.2x LTM EBITDA) – although working capital typically peaks in Nov/Dec.

NPAT up, EPS down

We upgrade our NPAT forecasts by 3-8% in forecast years, offset by the entitlement offer dilution which sees our EPS forecasts fall by 6-10% in FY21/22.

We increase the multiple applied to our earnings forecasts (PE and SOTP) and lower the RFR underlying our DCF/WACC which sees our DCF/PE/SOTP valuation increase (Morgans clients can login to view detailed reports and price targets).

Investment view – upgrade to ADD 

We think Super Retail Group can now attract a higher market rating given the resilience its businesses have shown throughout COVID and the restructured balance sheet.

Its businesses also look well placed to benefit from some key thematics including: increased domestic tourism and leisure activities, home-based fitness and a general acceleration in online consumption. Upgrade to Add rating.

Key risks:

  1. Further COVID-19 impacts
  2. A slowdown in consumer spending
  3. Heightened competition
  4. Further margin compression
  5. A significant fall in the AUD

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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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