Significantly Undervalued

I believe that the market is too focused on dusk’s(the “Company” or “DSK”) short-term earnings and, as a result, it is significantly discounting the future value to be created from the Company's store rollout strategy and its increasing online penetration. I believe dusk is worth >$5/share (see here: dusk Group Ltd - valuation 28.08.2021.pdf).

The following are the main arguments why Ibelieve dusk is a compelling opportunity at its current share price:

1)Unit economics

dusk has incredible unit economics. On avg., each newstore requires $65k to fitout (net of landlord contributions) & a further$40k to stock the shelves with inventory (totalling $105k initial investment). Withinthe first 12 months of opening, the avg. store generates $1m+ in sales &>25% store-level EBITDA margins, resulting in a payback period of <6months.

Further, it’s online store generated $11m insales alone over the past 12 months and, because of the lower costs associatedwith e-commerce, I estimate it records >50% EBITDA margins.

2)Fundamental shift in business model

I believe there is a fundamental shift indusk’s business which has been fast-tracked by the recent pandemic. A greaterpercentage of the Company’s total sales are coming from online, evidenced bythe steady increase prior to COVID (2017: 2.0%, 2018: 3.9%, 2019: 4.9%) followedby a noticeable uplift of 8.8% and 7.6% of sales in FY20 and FY21, respectively.I would expect online sales in FY22 to eclipse 10% of total sales considering DSKwill likely post declining physical store sales vs. double-digit digital growthin FY22.

	FY	Online YoY growth
1	2021	+27%
2	2020	+110%
3	2019	+45%
4	2018	+123%

Although I believe home fragrance products aremore effectively sold in a physical retail setting as opposed to online, since customerslike to be able to smell and visualise how a product will fit in their homebefore they buy, I see this as a complimentary channel to dusk’s physicalstores. For example, customers can initially browse and select products in storeand then conveniently follow up purchases online based on prior experience/taste.Converting scented consumable refills to online (13.8% of total sales) would bea great example of this.

I think there is a lot of room to improve onlinesales as a % of total and feel that it is very likely that online sales will contribute>15% of total sales within the next 3-4 years. For reference, Bath & Body Works (NYSE:BBWI) (specialty fragrance retailer in US) is currently generating >30% oftotal sales through online channel, and other specialty retailers here in Australiaare already starting to surpass 20% of total sales through online, e.g., Accent(20.9%), Baby Bunting (19.4%), etc. so I do not think it is a stretch to saydusk can achieve at least mid-teens in the medium term.

My expectation is that over time, as onlinebecomes a greater % of total sales, profit margins should rise meaningfully dueto the lower costs associated with e-commerce sales vs. brick & mortarstore sales.

3)Reinvestment runway

Management has the aspiration of operating 160stores across ANZ by 2024. While you could argue whether this timeframe is achievableconsidering the near-term disruption COVID is having in delaying internationalexpansion, however, I think there is plenty of upside to this target of 160 stores in theANZ market when you consider the ANZ footprint of some other retailers:

Millers – 267 stores*

Rockmans – 254 stores*

Just Jeans – 240 stores*

Jay Jays – 202 stores*

Noni B – 199 stores*

Michael Hill – 199 stores

Lovisa – 177 stores

Katmandu – 162 stores

dusk –121 stores

*As at CYE 2020

Further, I have not even mentioned the potentialof store expansion outside ANZ. If management can successfully execute on international expansion like Lovisa than dusk's network could be many multiples of its current size. However, this may or may not eventuate and I therefore view this as a "free option" since the market is not even pricing the possibility of this in. Nonetheless, even if we assume dusk never growsbeyond 160 stores (and therefore does not expanding outside of ANZ) than below is what dusk may becapable of earning (assuming unit economics are maintained & online reaches 15% of total sales):

	$Am	Stores	Online	Group
1	Revenue	160	28	188
2	Store-level EBITDA	40	14	54
3	G&A			8
4	EBITDA			46
5	Maintenance capex			3
6	EBIT			43
7	Tax @ 30%			13
8	Free cash flow			30

4)Business-savvy & financially Incentivised management

I believe Peter King is a first-class operator andhas been instrumental in improving margins (e.g., outsourcing the Company’sproduction, warehousing & distribution to third parties) and expanding dusk’sstore network since he took the helm in 2014. He owns 4% of the Company &management collectively (including Mr. King) own ~10% of DSK, aligning theirinterests with shareholders.

5)Conservative capital structure

dusk has a fortress balance sheet. $21m in cash,no debt & access to $6m in undrawn credit facilities which is ample funds requiredto execute on the Company’s store rollout strategy, continue paying at least20 cents/share in annual dividends, and enough to weather any unforeseeable stormsin the future.

Disclosure:

DSK is the largest position in my portfolio& my avg. cost price is considerably lower than the current share price