For those looking at ADH, here are some basics:
- The company was on track to achieve ~$52m EBIT for FY20. At last announcement, they also had $36m cash and about $50m net debt[**].
With those facts, and a market cap of $200m at the last price, you're paying 5 times EV/EBIT.
- During the last investor phone call, management mentioned they are running cash flow neutral (at a minimum) with online Australian operations. They also planned on this shutdown lasting longer than a few months, so they have sufficient cash.
- NZ online operations (Mocka) should be one of the first to open once stage 4 restrictions cease in late April. This should have them running cash flow positive.
- Leases will only be paid once stores are open, and likely to be in line with revenues. There's a slight risk they end up in court with landlords, but public sentiment is certainly with retailers, not landlords, as are commericial property market conditions. PMV have done the same thing, and two weeks later not one landlord has contacted them requesting rent.
- There are some improvements in the pipe for logistics, but no large payments/work there for at least a year.
- Those that are out of work have inflated welfare payments coming to them.
- Discretionary spend items are limited, as hospitality and travel will be some of the last to competely open up. As such, as bigger amount will go into consumer discretionary/retail.
- Australia has likely had the best response to coronavirus worldwide. I wasn't as confident of this as the clearly smarter individual who laid out the case, but they've been proven very right so far. This will mean things open a lot sooner (not borders, obviously).
- There are other impacts from government stimulus that may end up being largely inflationary, but you don't need to include these to make the investment case.
With that in mind, I am assuming that:
- Stores will be open within a few months, albeit with lower foot traffic for a while
- The next year won't have amazing earnings initially, but the following year will likely see close to a return to FY20.
- FY22 onwards should see EBIT at pre-corona levels ($50m+). Retail broadly won't perform well, but ADH have managed over 7% CAGR LFL sales in this environment. Mocka/online doing even better.
- Given interest will be about 2.6% of $50m ($1.3m), that leaves PBT at roughly $49m, or PAT at $34.3m (assuming 30% tax rate).
There's another case to be made for even greater earnings. But it's hard to see how you're not buying this at a maximum of 10 times FY22 earnings. That's still a 10% yield. (My average price is considerably lower than now, but I still think the current price makes sense).
There's also the case for a great depression. But we're no longer running deflationary policies of the late 20s and early 30s. I see policy makers erring on the side of inflation and going for too much stimulus (and perhaps govt jobs), rather than the alternative. But it's a risk you need to consider.
[**] They pulled cash out from their current credit facility and kept it with a separate ADI to ensure liquidity.
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