As the SP has run very hard, since I first posted under this thread, I thought I’d share my current view on TPW’s valuation and on my consequent course of action.
I will start with what I personally see as being a reasonable best-case scenario for the Company, on a medium- to long-term horizon.
Taking a 5-year view of the business, my aim is to first quantify what TPW can grow into, and then stabilise around, if things go to plan.
The Australian furniture and houseware market is currently worth ~14bn$ pa; making the working assumption that we are presently not above mid-cycle levels, this total market size can reasonably grow to 16.2bn$ pa in 2024; this merely corresponds to a 3% CAGR, which essentially only factors in population growth and CPI inflation.
Online penetration is forecast to increase from its current 4.5% to ~10%, at which point it would still be lagging well behind US/UK, where it is already 13%-15% and forecast to grow to ~20% by 2024.
If things do go to plan, TPW could conceivably increase their market share from its current 16% to 25% in FY24; that would imply a 32% revenue CAGR, which doesn't look unreasonable to me relative to their current >40% revenue growth rate, even factoring in a slowdown at a higher revenue base.
Assuming that, at that point, TPW stop reinvesting all their operating cashflow into marketing and distribution, and simply aim at maintaining a revenue growth rate in line with the broader market, one can then work out what a “steady-state” EBITDA margin could be. So, under the hypothesis above:
Revenue: 16,200m$*10%*25% = 405m$
Gross Profit: 405m$*45% = 182m$ (assuming constant GM, which doesn’t look unreasonable looking at the 5y history: FY19 44.7%, FY18 44.3%, FY17 42.9%, FY16 39.5%, FY15 40.4%)
Merchant Fees: -6m$ (assuming constant % of Revenue)
Employee Benefits: -30m$ (assuming 17.5% CAGR, in line with current trend)
Other Expenses: -13m$ (assuming constant % of Revenue)
To work out what a “sustaining” level of Marketing and Distribution expense is, I see 1/2 of the current % of Revenue (25%/2 = 12.5%) as being be a reasonably conservative estimate, so:
Marketing & Distribution: -405m$*12.5% = -51m$
That gives me a “steady-state” EBITDA of 82m$; applying a “steady-state” multiple of 10x to that gives me a valuation of 820m$.
To work out the total number of outstanding shares at that point, I will assume that the current equity compensation practices remain unchanged for the next five years, resulting in a dilution rate to the tune of 3.5% pa; that gives me 112.5m*1.035^5 = 133.6m outstanding shares in 2024.
Hence, 820m$/133.6m = 6.14$/share, and discounting back this forward valuation at a 15% pa equity return target rate gives me a Present Value per share of 6.14$*(1+15%)^(-5) = 3.05$.
Therefore, the current SP already exceeds what I personally see as a sensible valuation of the business under a best-case scenario.
In terms of what a reasonable recovery rate could be if things don’t work out: given that TPW is now debt-free and self-funded, I struggle to see how a possible de-rating could take its valuation permanently lower than 1x its revenue run rate; so, even if they delivered in FY20 only half of the >40% revenue growth they are currently experiencing, it should still be possible to recover ~125m$, or 1.11$/share.
When I originally bought the shares, in October 2019 at an average price of 1.76$, the equation 3.05$*P+1.11$*(1-P) = 1.76$ gave me an implied success probability P = 33%, which I thought was low, in the context of a Company that was actually delivering on their business plan despite a) a housing slowdown and b) the presence of Amazon.
But, now that the SP has reached and surpassed what I see as a full valuation, I personally see the risk/reward as being no longer attractive. As such, I have taken today’s rise as an opportunity to sell out of my holding entirely.
I guess I should add that I am not a big buyer of furniture/houseware, or a big shopper in general, so my personal perception of the sector may well be warped.
IMHO & GLTAH
(20min delay)