The stock is trading like it is anticipating a downgrade, so I thought I'd dust off the old financial model to get a sense of what is being priced in, and whether the share price represents a buying opportunity currently.
Firstly, to get a feel for the underlying performance of the business, and especially to test the the notion of the company having over-earned coming out of Covid and, hence, its earnings need to re-base downwards in some meaningful way:
In the chart below I've deconstructed the Revenue line by stripping out what I estimate to be the approximate half-yearly Revenue contributions from the acquisitions that were made subsequent to Covid (i.e., Exceed in August 2021 and the Hills security and IT business in May 2022).
The resulting
core DDR business Revenue is represented by the grey bars:
As can be seen, there was indeed a sharp lift (estimated at +27%) in the Core Business Revenue between the subdued DH2020 (the height of Covid) and DH2021.
But importantly, subsequent periods did not see a Revenue decline; the opposite, in fact: Core Revenues have continued to grow even from that elevated level. My modelling estimates growth in Core Revenue in DH2022 and JH2023 (based on Q3 update) of 11% and 12%, respectively, on pcp.
So pretty commendable, off that higher base; and certainly not in keeping with thoughts about a
cyclical high; far more like a
secular organic growth picture.
Especially when one considers the spare capacity in the company's DC and the additional capacity that is being added on the Kurnell site.
Why this is important to get right is because it is the factor that most strongly informs the type of valuation multiple one should apply to the stock.
Because if this is a merely cyclical business, and it is thought to be near a peak in its earnings cycle, then it needs to have a discounted valuation multiple applied to it (a sub-market multiple, say
13x or 14x, despite the company's >35% ROE).
But if it is indeed a structural growth business then - notwithstanding the "discretionary consumer spend" element that is probably been applied by the market - it should be afforded a premium-to-market multiple,
in the high teens and possibly even 20x to 22x.
Looking at the P/E multiple (prospective) history for the stock in the chart below shows a period of two distinct halves: years of modest P/E's (2014 to 2018), followed by a period of significant upwards shift (2019-2022) when the market did award the stock with that superior growth multiple.
As can be seen, the severe de-rating over the past 12 months has left the stock trading back at closer to a multiple appropriate for an
ex-growth scenario.
I don't think this is right; I think it's a mis-pricing with the market assuming that earnings growth is going to stall while I am of the view that DDR is a structural growth distribution business and should therefore have a multiple of 18x, and >20x when the market is sanguine about the health of the consumer, applied to it.
Yes, I know that at the end of the day, it is merely a distribution business and distribution businesses tend to lack durability, but DDR isn't distributing low-value or commoditised goods, where execution is not mission critical; the products DDR handles are of high value so distribution mistakes are costly, and DDR is clearly a differentiated player with a proven track record of doing what it does well, so there is at least some sort of commercial moat around the business.
Having gone through the exercise, I am satisfied that I should now add to my position, so I will be buying stock in coming days.
(With full recognition that the market could mark the stock down even further if interest rates continue to rise, but investing isn't about hitting the bottom-tick; its about identifying value and sizing portfolio positioning accordingly.)
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(20min delay)