Adairs: Sofa, so good - ADH acquires Focus on Furniture

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
30 November 2021, 8:30 AM
Sectors Covered:
Gaming and Retail

  • We think investors are already beginning to warm to the idea of ADH’s $80m acquisition of Focus on Furniture. We think ADH has got the business for a decent price and, while we concede it increases the group’s exposure both to the housing market and bricks and mortar retail (neither of which are terribly fashionable right now), we believe it will prove complementary to the core business and may offer enhanced opportunities for network expansion.
  • On a pre-AASB 16 basis, including Focus in our numbers delivers 11% EPS accretion in FY23, the first full year of ownership. And that’s without pushing the boat out too much on LFL sales growth expectations, store rollout, or synergies. Focus has 23 stores today, most of which are in Victoria, but ADH thinks it can increase this to 50-60 within five years. We assume the lower end of this range by FY27.
  • It seems to us that the market sees ADH as a COVID beneficiary that is unlikely to deliver much in the way of organic growth over the next few years. Buying Focus perhaps hasn’t done anything to dispel this notion. But we think that’s unfair. Our estimates are for an EPS CAGR of 21% between FY20 and FY24F. The acquisition of Mocka and Focus play a large part in driving this, but even organically, a combination of a very strong loyalty programme, GLA growth and cost efficiencies underpin a growth story that we think is going under the radar. ADD.

ADH acquires Focus

ADH will acquire Focus on Furniture (‘Focus’) next week for $80m, debt-free. The consideration is $74m in cash and $6m in new ADH shares, issued to the majority shareholder and current CEO of Focus, who will stay with the business. Focus is a retailer of furniture such as sofas, beds and tables.

It has 23 physical stores and an online business. Online sales accounted for 12% of Focus’s revenue in FY21, but this is expected to moderate down to around 6-7% in FY22. Physical stores are concentrated in Victoria (15), with the remainder in NSW, Queensland, South Australia and the ACT.

ADH believes there to be complementary customer and product overlap. Focus is vertically integrated, with design performed in Melbourne and manufacturing in Southeast Asia.

EPS accretive

On a pre-AASB 16 basis, our EPS estimate for FY23 increases from 38.0c to 42.2c, representing 11% accretion. This does not make any assumption of synergies. ADH itself has said it expects the acquisition to be ‘double-digit’ accretive in FY23 and ‘immediately accretive’ in FY22.

We understand Focus’s earnings have been rather uneven in recent years. FY21 was very strong, with sales of around $150m and EBIT of $32.8m. On this basis, the purchase price is only 2.4x trailing EBIT. ADH, to its credit, has provided an estimation of ‘sustainable’ earnings after the unusual trading patterns of FY21.

This is revenue of around $125m and EBIT of $12-14m. On this basis, the purchase multiple is 5.7x-6.7x EBIT. We model Focus at the midpoint of this guidance at $13m in FY23. We assume gross margins for Focus in the low-50s.

There is no change to ADH’s dividend policy of 65-80% payout ratio.

Forecast and valuation update

As well as including Focus in our estimates, we have introduced a new earnings model based on the AASB 16 accounting standard. On this basis, our FY23F group EPS forecast is 41.7c, 16% higher than our forecast for FY22F of 35.8c.

Despite funding the acquisition of Focus mainly with new debt, the post-deal ND/EBITDA is forecast to be 1.1x FY22F.

Investment view

We believe ADH is too cheap for the growth and dividend income it offers. On our estimates, it trades on a single digit PE multiple of less than 9x in FY23.The forecast dividend yield in that year is 8.0%.

Our 12-month price target increases to (login to view). We reiterate an ADD recommendation.

Price catalysts

Downturn in consumer spending on homewares and furniture.

A failure to achieve growth ambitions for Focus.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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