A Turnaround Possibility

I have looked at this, rejected it and now picked it up again. Conclusion: I think it is a turnaround scenario though it won’t be easy and it won't happen in the short term. My straw poll of a number of physical locations says that morale is not too bad and there was a sense of "cautious optimism" expressed at the recent Franchisees meeting on the Gold Coast. The feeling is that if anyone can do it, John Hardy can.

Discussions with a number of company store managers and franchisees have gleaned these facts:

•    JH coming back is a positive. If anyone can do it, he can.
•   The mood is cautiously optimistic
•   Had a franchise meeting on Gold Coast a few weeks ago. Mood good.
•    Sales are steady – foot traffic improving – going for the add-on sales now
•   Still a few problems getting stock
•    Marketing needs to be revamped but the recent ‘Trade In & Save” program is generating excellent foot traffic
•    Business model is still working
•    The change in the way slow moving stock is handled has given some reward to the salespeople so they now promote it – previously it was a case of why bother!

So, here’s the past history.

In 2006 Godfreys (GFY) was sold to private equity interests for $300m representing a multiple of 15 times the EBITDA of $20m – an utterly astonishing figure! Sheer lunacy! These guys would buy the Sydney Harbour Bridge! They must have seen potential but they failed to exploit it. In fact the business went backwards, no doubt the GFC didn’t help.

In 2011 John Johnston (JJ) and a financier bought the business back for a rumoured $100m when the EBITDA had declined to around $10m…10x EBITDA! A bit high but understandable.

Between 2012 and 2014 JJ built the EBITDA from $10.3m in FY12 to $19.9m in FY14
Then in early FY15 they re-floated approx. 70% of the company with the Nov 2014 prospectus using these forecasts upon which to assess value:

	Column 1	Column 2
0	Forecast FY15 EBITDA	$22.1m
1	Share price	$2.75
2	Shares after prospectus	40.3m
3	Market Value of re-floated company	$110.8m

In actuality, GFY mostly met its prospect forecasts with a few differences

	Column 1	Column 2	Column 3
0		Forecast	FY15 Actual
1	Sales	$185m	$180.9m
2	Gross Margin %	62.3%	54.6%
3	EBITDA	$22.13m	$22.8m
4	EBITDA/EV	5.91x	7.5x
5	Share Price	$2.75	$2.99
6	NPAT	$12.25m	$11.5m
7	EPS	30.4c	28.51c
8	# of stores	221	212
9	Sales per store	$837k	$853k

When compared to forecast, FY15 sales were down by 2%, NPAT down by 6% but the market was well satisfied with GFY and the SP had increased from the listing price of $2.75 to $2.99 (closing price on June 30 2015)!

In FY16, the “wheels fell off the trolley” courtesy of the CEO miss-reading the market on the innovative stick vacuums and both store sales and margins suffered. Cash flow also suffered as stock and receivables increased whilst the company continued to spend in establishing more company stores. Plus they bought a wholesale cleaning business in New Zealand.

	Column 1	Column 2	Column 3
0		FY15 Actual	FY16 Actual
1	Sales	$180.9m	$179.3m
2	Gross Margin %	54.6%	54.1%
3	EBITDA	$22.8m	$17.5m
4	EBITDA/EV	7.5x	4.23x
5	Share Price	$2.99	$1.08
6	NPAT	$11.5m	$9.2m
7	EPS	28.51c	22.64c
8	# of stores	212	222
9	Sales per store	$853k	$808k

EBITDA was down 23% and NPAT by 20% and the market punished the company by reducing the share price from $2.99 @June 30, 2015 to just $1.08 @ June 30, 2016…a massive fall of 64%

FY17

Worst Case Scenario

In looking forward to FY17 I have adopted a very conservative approach as below and have used the SP of 14/9/16 @ 84c):

	Column 1	Column 2	Column 3	Column 4
0		FY16 Actual	FY17 Forecast Conservative	FY18 Forecast Optimistic
1	Sales	$179.3m	$175m	$185m
2	Gross Margin %	54.1%	52%	54%
3	EBITDA	$17.5m	$17.0m	$20m
4	EV/EBITDA	4.23x	3.3x	2.86x
5	Share Price	$1.08	$0.84	$0.84
6	NPAT	$9.2m	$8.1m	$11.4m
7	EPS	22.64c	20c	28c

I would value this stock at $1.43 and this is using a high required rate of return on earnings of 13.95%...so to buy at 84c is a massive margin of safety of 41%

FY18

But should John Hardy get his act together and put the necessary improvements in place I have estimated eps at 28c and a stock value using the same metrics as above of $2.02…the margin of safety in this scenario would be 58%

Final comment: If Hardy does generate 28c in FY17 or FY18, the EBITDA will be about $20m (about the same as when PEP bought the coy in 2006)…They paid 15 times EBITDA…we are only paying 2.86 times! I think it is worth the punt.   

Sorry...one more point and then I'll jump off the soap box: CASH! Yes it is light on but some posters have suggested they have tapped out. Not so. At June 30 they still had soem $8.4m in undrawn facilities. This, plus converting stock back into cash should see them through the crisis.  But a cap raising might still be on the cards. A speciality analaysis program I use see GFY ranked lower than 95%  of some 1,000 companies in the global speciality retail industry.