A cheap way to invest into the re-rating of the retail sector

Hi,

Even it is difficult to forecast retail sales from Q4 FY 21, I am more and more convinced that margins increase in the retail sector may remain going forward for different reasons :
- the significant increase of AUD (reverse of what happened in 2018 and 2019 and impacted gross margin at that time),
- less pressure on rents (thanks to change in their relationship with landowners),
- better productivity (thanks to more flexibility and programs like jobmakers),
- less store openings going forward (subjective).

It is interesting to note that most of the retailers share prices have been on a consolidation phasis since October 20.
Now seems to be a good time to come back on the retail sector and look for new names to buy.
Adairs and Motorcycle Holdings (MTO) seem to me 2 interesting retailers to buy now.

I like MTO for 2 main reasons :
- better margins expected to stick like for the rest of the retail sector,
- strong improvement of their financial situation (cash increase by 30 m in FY 20 and 20 m for the first part of H1 FY 21), due to the strong improvement of their earnings (rebound of the motorcycle industry since May 20 + operating leverage) and effect of job keeper (12 m cumulated in FY 20 and FY 21).
As a result, MTO has significantly improved its risk profile, as they do not cumulate any more an operating leverage and a financial leverage (net financial debt now limited).

Like indicated in my previous posts (in October 20), I am still not convinced that they are in a growing sector. Pre-covid, new motorbike sales were quite flat during 4 years. However, I have now more confidence that the company is able to grow its sales (in a flat sector) for different reasons :
- regular growth for their sales of used bikes (+ 10 % per year),
- expansion of their product offering by adding new brands to existing dealerships,
- regular acquisition of new dealerships (at good prices).

Looking at their valuation, the stock is cheap with a free cash flow yield of 16 %, based on FY 20 free cash flow, excluding the effect of Jobkeeper.