Stolen from asx bets, this lad has done a top write up. Enjoy!

https://www.reddit.com/r/ASX_Bets/comments/mxf6g8/dd_dusk_more_than_just_candles/

DUE DIDDLYGENCE ON DUSK

ASXSK Share price: $3.63 SOI: 62.2M MC: $226M

Why should you care

Capital light business with strong cashflows

Scalable business model with low ROCE (see two points down) on new stores

Experienced management with full performance hurdles incentivising management to grow EPS by 15% per annum and total shareholder return by greater than 15% per annum

Good reinvestment opportunities (stores cost ~$210,000 to open and the average first year return is $281,000). Therefore, payback period is less than 12 months

High gross margins and a differentiated business model

Relatively low evaluation on an EV/EBIT and EV/FCF basis

Tailwinds heading into 2H FY2021 from AUD/USD exchange

No debt, $35M cash representing 56c of cash per share

Why could this be mispriced

Recently IPO’d in November 2020 when there was lots of positive vaccine news

Market believes this is just candles, however, candles only make up 34% of total sales. The other 66% is attributed to homewares, mood reeds, diffusers and consumables and others. A lot of these are repeatable sales and not one-offs.

As it is new, its financials don’t show up on many websites yet but will after the FY21 results

Strong guidance updates given which haven’t fully been digested by the market

No explicit dividend announcement, however, when FY21 results drop and show its trading at a 12% grossed up value, we should see dividend hunters coming in to increase the evaluation. Go to commsec and across to details and you'll understand what I mean here. Currently listed as -% dividend yield so can't be found on scanners.

Uncertainty around post-pandemic normalised revenues and how a post-covid world will affect sales

Q3 FY21 Trading Update

Q3 Sales: $27.7M ; Q3 EBIT: $4.9M ; Q3 EBIT Margin: 17.6%

1H FY21 Results

FY21 9-month YTD (June-March) Sales: $118.7M; EBIT: $33.2M ; EBIT Margin: 28.0% (Important later)

Risks

Cyclical nature of retail and changes in consumer trends

Expansion in NZ or elsewhere could fail

Excess cash on balance sheet could result in poor acquisitions if they eventuated

The 2020 shitstorm and stimulus bringing forward sales

Increased rates in the future and obviously market meltdowns, however the latter is not representative of the business operations

Stores and Operations

Dusk currently operates and owns 118 companies as of December 2020.

The ROCE on stores is less than 12 months

Top 20 Holders

. However, this is now inaccurate as we know:

WAM have been buying and hold 3,346,461 shares (~5.37%)

BB Retail Capital have reduced from 4,531,258 (7.28%) to 3,831,258 shares (6.2%). And again, BB Retail Capital have reduced to 3,090,393 shares (5.0%) Still significant holder

Catalyst Buyout Fund 2A have reduced from 25.4% to 14,296,049 shares (23.0%)

Based upon this we know approximately ~86% of the SOI are held via the top 20.

Peer Comparisons

Let’s look at their retail counterparts: Lovisa (ASX:LOV), Adairs (ASX:ADH) and Shaver Shop (ASX:SSG)

Lovisa is a fast-fashion style jewellery retailer. It has higher multiples and MC as it has expanded outside of Australia and NZ to Europe, NA and Asia.

Shaver Shop I’m sure you’ve all heard of. Personal grooming products for your pubes.

Adairs is an Australian home furniture and homewares retailer, similar to Nick Scali as well.

Keep in mind this is all 1H FY21 data, and DSK is in what I would refer to as an explosive phase of growth, so this is completely inaccurate come FY21 results.

CompanyMarket CapEVSalesEV / SGMEBITEBIT MarginEV / EBITDivvie Yield %ASX:SSG$132M$91M$123.6M0.73x44.7%$28.0M22.6%3.25x5.73%ASX:LOV$1600M$1659M$146M11.36x77.8%$30.520.7%54.3x1.35%ASX:ADH$828M$806M$243M3.21x66.1%$60.2M24.8%13.3x4.9%ASXSK$226M$191M$90.9M2.10x67.7%$28.3M28.0%6.74x8.26%ASXSK FY21 Guidance$226M$191M$150M1.27x67.7%$38M28.0%5.0x8.26%

If you can put two and two together, it would seem that assuming Dusk can maintain close to 25% EBIT margins and grow sales at more than 5-10% per annum, that this is materially undervalued compared to its peers. ASX:LOV does get the exception that it is international, however. So, if Dusk were to reach a point where they expand overseas, I would expect to see a similar material raise in evaluation.

Evaluation

We’re using EV/EBIT and not EBITDA due to pre-lease expenditures (AASB16). Market cap – Cash + Debt = Enterprise Value

So $226M – (~$35M) + $0 = $191M EV

FY21 Sales Guidance of $147-151M and EBIT Guidance of $38-40M

$191M EV / $38.5 EBIT = 4.96EV / EBIT

We’ll also assume an evaluation using NPAT.

Sales guidance of $147-151M as outlined by company.

EBIT Margin for the YTD to the March update was 28%.

Net income of $147-151M * 0.28% = $41.1M-$42.2M * 0.7 (30% income tax) = $28.7M-$29.5M

FY21 EV/Net income = $191M / $28.5M = 6.7PE

Dividends

Management have stated payout ratio of 60-80% so we’re assuming 70% payout ratio = $19M / 62.2M SOI = $0.305c FY21 Dividend

Yield = 0.305 / $3.63 = 8.4% fully franked, grossed up to 12%.

We should get an increase in evaluation as dividend hunters come into buy. They could push this anywhere up to a 5% yield resulting in a $6.10 share price which is a 68% upside.

Why the FY21 Q4 and 2H FY21 update is going to be stellar

Q4 2020 was a shitstorm. They had numerous store closures (20 stores in Melbourne which is 17% of their store totals were closed for 3 months) across April and didn’t reopen until the first week of May, where they had reduced trading hours and a progressive reopening.

Q4 of FY21 includes Mother’s Day (tell her you love her you dog and get her a Dusk candle)

Q4 2020 would have had reduced foot traffic in general. Now as most things are now reopened you have more generalised customer foot traffic and higher likelihood of spontaneous sales

Increase in Dusk rewards members (630k) driving repeat sales ($54M). Dusk members account for 59% of sales

New web platform going live in April and increased data analytics hopefully driving increased online sales

Stronger gross margins to 67.6%

Higher average transaction value (average spend $54)

AUD appreciation should provide a material tailwind to gross profit growth

10 more new stores compared to same time last year. Resulting decreased in cost of doing business (CODB) from 45.7% in 1H FY20 to 34.7% in 1H FY21, so we can expect CODB% to be lower on 2H HY20 as well

Jobkeeper wage subsidy may be a risk here as they are repaying $2.8M in 2H 2021

TA for the chart dickheads

Looking for buys at $3.20-$3.40

Looking Ahead to FY2022

Let’s assume $150M FY21 sales and a sales drop of 10% or only increases by ~5% in FY2022, resulting in $135M and $157M sales respectively. Assuming $191M EV. Assuming gross profit margins hang around 66% still and EBIT margins remain around 22% (This is a 21% decrease in EBIT margins, so we are hopefully assuming worst case scenario here). This EV calculation also assumes no additional cash; however, this is very unlikely to be true.

Scenario 1: 10% drop in sales = $29.7M EBIT and $20.7M in NPAT

Scenario 2: 5% increase in sales = $34.5M EBIT and $24.1M in NPAT

1: $20.7M NPAT @ 70% payout ratio = 23c dividend at $3.63 = 6.3% yield

2: $24.1M NPAT @ 70% payout ratio = 27c dividend at $3.63 = 7.4% yield

1: 10x EV/EBIT = $4.21 share price

2: 10x EV/EBIT = $4.98 share price

Now let’s do the same assumption with 28% margins for FY2022:

1: $5.51 share price

2: $6.50 share price

Final Evaluations

High-quality capital-light business offering with strong gross profit and EBIT margins. In excess of 50% upside in 12 months and likely in excess of 100% over 3 years. Suck my dick ETF boys. DYOR. GLTAH. Not financial advice. I’m just a retard on the internet.

FY21:

10x EV/EBIT evaluation = $5.62 (+54.8%)

EV/NPAT evaluation @ 10PE = $4.01 (+10.4%)

EV/NPAT evaluation @ 15PE = $6.31 (+73.8%)

5% dividend yield evaluation = $6.10 (+68.0%)

FY22

Anywhere from $5.51 - $6.50