Adairs: Early settlement of deferred Mocka consideration

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Former Senior Analyst
Date posted:
23 June 2021, 12:00 PM
Sectors Covered:
Consumer Discretionary (Retail)

  • The deferred consideration payment for Mocka will be brought forward.
  • While this is positive from a management/investment perspective in the long term, the 7x FY21F EBIT multiple implies a softer 2H earnings performance vs our forecast (-12%) with increased investment to create sustainable long-term growth the likely cause.
  • We lower our rating to Hold with the stock now within (login to view). We highlight we are not lowering our rating due to lower Mocka earnings in FY21.

Event

The 35% deferred consideration payment for Mocka will now settle earlier than expected (Sept 2021 vs 15% in Sept 2021 and 20% in Sept 2022).

We think the early settlement is positive from an investment perspective, but it does imply lower earnings from Mocka in FY21 vs our forecast.

Analysis

Adairs (ASX:ADH) will settle the remaining 35% of its Mocka consideration in September 2021 (previous agreement was 15% in September 2021 and 20% in September 2022).

The consideration for the 35% is A$45m, taking the total to A$95m – 7x FY21F EBIT.

The multiple provided implies FY21F Mocka EBIT of cA$13.6m, c12% below our forecast. This implies a relatively flat hoh and yoy earnings outcome for Mocka and considerable 2H margin decline. We expect ADH has invested considerably in the business during the half.

Mocka’s sales performance was not disclosed, but we expect a strong performance (+35%). The aforementioned investment is clearly critical to maintaining strong and sustainable top-line growth rates in the future.

A new CEO of Mocka is expected to be announced at or around the release of the group’s FY21 result (August).

With the lower implied Mocka earnings, we find it interesting ADH did not provide a group trading update/FY21 guidance concurrently (with one week of trading to go). To us this suggests that perhaps consensus EBIT forecasts of A$106m are in the ballpark.

Forecast and valuation update

We lower our Mocka forecasts accordingly, which sees our EPS forecasts fall by c2% in FY21.

We continue to forecast ADH’s earnings fall by c20% in FY22 based on the assumption that LFL sales growth turns negative, gross margins ease off elevated levels and opex deleverage on the negative LFL sales growth assumption. We think risk lies to the upside in respect of our forecast.

Our DCF/PE valuation falls modestly to A$4.46 (from A$4.50).

Investment view

With the stock now trading (login to view) of our valuation, we lower our rating to Hold.

We think the early settlement of the Mocka deferred consideration is a positive outcome for ADH and will allow for appropriate investment to drive market share growth over the long term.

We continue to favour ADH’s attractive valuation (12.5x FY22F) and yield (5.5%). We are also encouraged by ADH’s confidence in retaining incremental customers, retaining a large portion of recent GM wins and strong balance sheet.

Price catalysts

FY21 result (20 August 2021): ADH’s sales trading update and margin outlook commentary will be key.

Risks

COVID-19; material deterioration of the AUD; softening LFL sales growth (softer consumer spending/housing market/more difficult comps to cycle); product execution; excess discounting; and increased competition.

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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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