Accent Group: Model update

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
10 January 2022, 10:30 AM
Sectors Covered:
Gaming and Retail

  • We have remodelled Accent Group (ASX:AX1) following a change in analyst coverage.
  • Our new EBIT forecast for FY22 is $97.4m, 4.6% lower than our previously published estimate of $102.1m. According to Visible Alpha, market consensus is $103.4m.
  • Our 12-month target price is (login to view).

Forecast and valuation update

At its AGM in November 2021, AX1 indicated that the temporary closure of around 400 of its stores due to lockdowns in several key markets reduced sales by $86m and EBIT by $40m in the first 18 weeks of 1H22. Our new FY22 group sales forecast is $1,032.7m, 5.2% lower than our previous forecast of $1,089.1m.

We forecast a gross profit margin of 54.1% in FY22, down 200 bp yoy. AX1 disclosed at its AGM that promotional activity during lockdown impacted gross margins by 700 bp, but that margins had recovered since the re-opening of stores. Our EBIT margin forecast for FY22 is 9.4% (the same as our previous model).

AX1 opened 63 stores in the first 20 weeks of FY22, just two stores short of its original guidance for the whole year. It upgraded this guidance to 120 new stores at the AGM. We include 120 new stores in our model, offset by 5 closures.

We expect AX1 to release its 1H22 results after market on 22 February. We forecast a 53.3% drop in first half EBIT to $38.2m, with the decline mainly a function of the impact of lockdowns and the non-recurrence of the $9m JobKeeper benefit received in the PCP. Our estimate is 19% lower than Visible Alpha consensus ($47.4m with a broad range of $36.5-58.5m).

Our new valuation model is based on a blend of DCF and EV/EBIT methodologies. Our updated 12-month price target is (login to view), 6.6% lower than our previously target.

Investment view

AX1 has a multi-faceted growth strategy, but this is countered by a 23x FY22F P/E ratio, higher gearing than many of its peers, and the reliance on distribution agreements with large third-party suppliers.

We rate the stock a HOLD.

Risks

Loss of distribution agreements, or a deterioration of terms on renewal.

Failure to roll out stores as expected.

A downturn in consumer discretionary expenditure.

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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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