DSK SP $3 - what would it take?, page-24

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04/02/24

12:13

Post #: 72226708
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Originally posted by LachlanC95: ↑

When considering free cash flow, you have to think of how much money the business spent back into growth, and where it is headed.

I.e, it opened 13 new stores and expanded into NZ in FY23.

Store openings cost money, and are targeted to be profitable after 12 months of trading, historically they are also again more profitable after 2 years.

If all I cared about is free cash flow on a 12 month accounting ‘type’ basis, I wouldn’t open a single new store as they aren’t profitable until after 12 months, and I’d just maximise cash flow out of the existing (145 -13 = 132 stores).

So you take away those expenses associated with new stores openings/attracting and marketing customers in that local area, hiring new staff, training etc (I don’t know how much it is but I’m guessing between 1 to 2 million $)

No new store openings in FY 23:
$9,968,000 + say $2,000,000 = free cash flow of $11,968,000.

Now here’s the interesting part, Dusk opened 13 new stores in FY23 but has $700k less revenue than FY22 ($138, 393,000 vs ($137,623,000 FY23) yet their CODB increased by $9,000,000 ($6 mil to wage increase costs and $3 mil to suppliers who manufacture Dusk products).

- FY23 saw undoubtedly a high rate of inflation, to manufacture goods & employee staff costs.
- Is FY24 employee and staff wage costs accelerating or disinflationary (I’d guess decreasing by the amount it increased relative to the prior year).
- Will consumers discretionary spend $ be less or more in FY24 than FY23? (I honestly do not know, we will find out on 24th Feb when results come out).

Add these factors up all together and you will get free cash flow, which can be very roughly extrapolated out and guesstimated into a few years time.

Expand

You are welcome to make adjustments to boost the free cashflow figure.

I wouldn’t personally as if they ceased growth they would be in structural decline due to the occasional store closures.

What would you pay for a business that can grow its earnings by 10% per year on a long term basis? Perhaps 10 time earnings. This is ‘potentially’ what DSK could be valued at today if there was confidence in the base from which those earnings will start.

If they stopped investing in growth, what would you pay for a business that’s earnings might decline by 5% pa due to stroke attrition. Potentially 6 times earnings?

You (and others) have suggested DSK is worth 10 times earnings as a minimum. That is reasonable - but then you cannot ignore the cost of opening new stores, as this is necessary to achieve that valuation.

DSK Price at posting: 97.5¢ Sentiment: None Disclosure: Not Held
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