Ann: Change in substantial holding, page-3

I think they might be making the error of trying to defend their position going into a downgrade.

And the problem is that, despite the meaningful fall in the market value over the past 3 months, I feel the stock still isn't valued for any further downgrades.

I've been doing a bit of scratching around in the detritus that is the consumer discretionary sector and BLX is a company that I've been following for a number of years, having been a shareholder in the past.

Like just about all retailers, it isn't a business for all times; its earnings and valuation are cyclical.

But as retailers go, this one has actually been managed reasonably well, avoiding the usual temptation of getting sucked into aggressive lease obligations in the pursuit of growth, meaning its fixed charge coverage ratio wasn't overly stretched when the retail cycle downturn struck.  

So even though the company isn't currently in bad financial health (let along perilous shape, like many over-stretched and over-leased retailers), it is still operationally leveraged and, just as that leverage is a boon during consumer spending strength, it is a headwind during downturns.  

That said, I think an acceptable investment set-up could materialise in coming weeks, and my intention is to buy the stock when either:

1.)   the current downgrade cycle ends, or
2.)  the stock is valued like it is already anticipating the downgrades

Problem is, I don't believe those pre-conditions exist yet.  They are approaching, but not quite completed to the point that the stock is a buy, I don't believe.

The issue for BLX hasn't been top line: store roll-outs in have cushioned the blow of the sluggish customer base over the past 12-18 months, masking the inherent cyclicality of the business (the blue columns represent my forecasts, for what they are worth, and reflected a positive variance occurring only in JH2025):




But the operating margins are unable to hide the effect, with EBIT margins compressing from peak levels above 20% in FY2020 and FY2021, down to the mid- to high teens. Again, my (prudential) margin forecasts show a further decline, to a level somewhere in the low-teens, corresponding to what I expect will be the cyclical low for the business):



So, looking at further downside, I think that the cycle-bottom case would be for, say, 13% EBIT margin on $330m in Revenue, so EBIT of ~$43m (for context, BLX's EBIT for the past three years was, respectively, $59.5m, $63.8m and $54.8m, so $43m outcome would reflect a business in a world of hurt).

Now, capitalising that $45m EBIT at a conservative EBIT multiple of 10x, yields an EV of $430m (which is also the value of the equity, given the company has no net borrowings), which equates to 190c per share.

That simplistic assessment implies a further 15% potential fall, to my bare-bones, bottom-of-the-cycle, valuation, at which I would consider the stock to be a resounding buy.

At current price levels, I think it is reasonably priced, but the earnings momentum delta is still negative which means the stock is highly unlikely to outperform.

It's not a bad business - GP Margins of ~68% reflecting a strong brand presence and healthy market position and through-the-cycle ROE of ~25% reflecting prudent capital management.  

Just not cheap enough, is all.

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