Strong retail momentum continues but be selective, Part 2

Published at Jul 10, 2018, in Features

After yesterday examining some of the basic retail areas such as supermarkets, grocery stores and department stores with limited investment options, today we are presented with a wide range of stocks to choose from across popular sectors.

One of the sectors involves the home, with companies active in areas such as construction and renovation under the microscope.

We also look at the takeaway food services sector and come up with the stock idea that perhaps only a few think of in terms of what fits into the cafe and restaurant space.

The other two areas relate to the pharmaceutical and clothing industries with the latter presenting an interesting option in terms of taking advantage of consolidation in the women’s fashion sub-sector.

Hardware, building and garden supplies

This could be one for the yield chasers.

The sector has been extremely resilient over many years, and this year is no exception with year-on-year growth of 1.5 per cent and May turnover being 2.7 per cent ahead of April.

Investors looking for some growth exposure could consider Reliance Worldwide Corporation (ASX:RWC), a prominent player in the design, manufacture and supply of high quality premium branded water flow and plumbing products.

Those considering this stock shouldn’t make assumptions regarding future sales, nor should they base investment decisions on performances to date. Those considering this stock should seek independent financial advice.

However, the company’s shares have nearly doubled in the last 12 months, and with a fiscal 2018 PE multiple of 35, the two-year compound annual earnings per share growth rate of circa 30 per cent appears to be factored in.

Perhaps this is reflected in the consensus share price target of $4.82 which represents a significant discount to the recent trading range of $5.50.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

BWP Trust (ASX:BWP) had 79 Bunnings Warehouse properties in its portfolio as at the end of December 2017.

The company has consistently delivered strong dividends and dividend growth.

Its ability to continue to outperform expectations is assisted by predetermined rental reviews, as well as the sustainable expansion of its property portfolio.

The performance of Bunnings stores has been strong, indicating that it shouldn’t be in a position where it is faced with rental defaults.

Most rental agreements are over a long-term providing earnings and dividend predictability and visibility.

Management recently informed the market that it would be paying a final dividend of 9 cents, bringing the full year dividend to 18 cents. This implies a yield of 5.5 per cent relative to Thursday’s closing price of $3.28 - much better than bank interest.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Takeaway food services

Silver Chef (ASX:SIV) has had a tough year, making some hard decisions, most notably shutting down its GoGetta equipment hire business.

That said, exiting the underperforming business was the only option and with Silver Chef returning to its roots as a provider of products to the hospitality industry on a long-term rental basis it could be poised for a turnaround.

When the company delivers its fiscal 2018 result in August, it will take the financial hits that come with the decisions taken.

However, investors don’t seem to be able to see past that, as its share price is languishing in the vicinity of $3.00.

What should be noted is that despite these circumstances the company’s hospitality business still expects to deliver an underlying pre-tax profit of circa $18 million.

With the company poised to operate off a low cost base and without the impost of one-off write-downs in fiscal 2019 one would expect the group’s financials to appear markedly better.

This is a company that for a period of more than 10 years since listing in 2005 consistently delivered strong earnings and dividend growth by employing a very simple business model.

It services the cafe and restaurant market which is the second best performing retail sector on a year-on-year basis, and it also should be noted that turnover from the ‘other specialised food retailing’ sector was up 2.9 per cent on a year-on-year basis in May.

Consequently, Silver Chef appears to have exposure to buoyant markets and looking to the future it should benefit from expansion in North America where it can generate strong growth off a low base due to its comparatively recent entry into that region.

Pharmaceutical, cosmetic and toiletry goods retailing

It has been a strong year for the pharmaceutical industry with year-on-year growth of 3.9 per cent.

One of the benefits of the industry is that a significant proportion of revenues are generated through non-discretionary spending.

With an ageing population there should be natural organic growth in health-related revenues.

It is hard to go past Australian Pharmaceutical Industries (ASX:API) in this sector given that it has circa 460 pharmacies in every corner of Australia with a premium stable of brands including Priceline, Soul Pattinson and Pharmacist Advice.

The company is financially robust, leaving it well-placed to continue to grow through store expansion.

API recently demonstrated its ability to push into adjacent markets with the $127 million acquisition of Clearskinclear Clinics.

Management views the addition of the business as highly compelling and complementary, providing diversification and the potential for accelerated growth.

Through its existing business, API believes that it has a clear understanding of customer demographics in the health and beauty industry and with its proven operational capabilities in network growth, retail marketing and consumer goods development this could be a one plus one makes three transaction.

Analysts at Blue Ocean Equities estimate that the acquisition will be 8.5 per cent EPS accretive in fiscal 2019, prompting the broker to increase its valuation and price target from $1.80 to $2.00. This implies circa 30 per cent share price upside relative to Thursday’s closing price of $1.50.

It should be noted that broker projections and price targets are only estimates and may not be met. Those considering this stock should seek independent financial advice.

Clothing retailing

The clothing sector has performed strongly with year-on-year growth of 2.1 per cent and May turnover 3.5 per cent ahead of April.

This has provided share price momentum for many players in the sector including the large diversified retailer, Premier Investments (ASX:PMV), as the company’s share price recently hit a 12 month high of $17.37, only just shy of its all-time high of $17.92.

Noni B (ASX:NBL) has also benefited from positive sector sentiment with its shares increasing from $1.70 to circa $3.00 in the last 12 months.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

There was a significant development in May when the company announced the proposed acquisition of Specialty Fashion Group’s (ASX:SFH) portfolio of key brands including Millers, Katies, Crossroads, Autograph and Rivers.

This provides Noni B with the benefits of scale which include improved buying power and a significant increase in its share of the women’s clothing market.

Post the acquisition, the company will be one of the largest women’s apparel retailers in Australia with over 1350 stores across nine brands.

The acquisition prompted analysts at Morgans to increase their price target from $2.73 to $3.50 which implies upside of nearly 20 per cent relative to Thursday’s closing price of $3.03.

The addition of these stores will generate medium-term earnings growth as they are brought under the Noni B umbrella.

The most significant increase in annual EPS projections made by Morgans was in fiscal 2020 with a 38 per cent lift to 34 cents per share.

This implies a forward PE multiple of 8.9 which appears conservative given the company now has one of the best medium-term growth profiles in the sector.

The company also presents as an attractive yield play from fiscal 2020 with Morgan’s forecasting a dividend of 20 cents per share, implying a yield of 6.6 per cent.

It should be noted that broker projections and price targets are only estimates and may not be met. Those considering this stock should seek independent financial advice.

Tomorrow we look at companies that are active in the footwear, furniture and fun and fitness sectors, as well as an interesting play in the liquor retailing space.

This article is General Information and contains only some information about some elements of one or more financial products. It may contain; (1) broker projections and price targets that are only estimates and may not be met, (2) historical data in terms of earnings performance and/or share trading patterns that should not be used as the basis for an investment as they may or may not be replicated. Those considering engaging with any financial product mentioned in this article should always seek independent financial advice from a licensed financial advisor before making any financial decisions.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

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