p/e < 7x, div yield of 6.85% + earnings growth

Hi guys,

Given the recent surge in profits for both David Jones and JB Hi-Fi, I thought I should point out the value in a long forgotten small cap. stock called Radio Rentals. Given the re-rating seen by the broader retail sector over the course of the past 3-4 months, I believe Radio Rentals is due for a strong re-rating. Reasons are:

1) Radio Rentals has shown that their model is recession proof, performing well in both boom conditions as well as during the past 18 months.

2) Their profits have grown every year since listing and they have always exceeded analyst expectations. Yet they are still trading on a prospective FY'10 P/E of 6.95x.

3) Extremely strong cashflow generation shown in the last report in May. (they have a March year end).

4) At current prices they are paying a dividend yield of 6.85% Fully Franked.

5) I know it is hard to compare Radio Rentals to a straight retail stock like JB Hi-Fi or Harvey Norman. However, if you look at the attached financial metrics, you will see that there is a huge discount applied to Radio Rentals when compared to the rest of the retail segment:

FORECAST FY'10 financial metrics
Company_____Price_____P/E______Dividend yield___Net Debt

Billabong_____$9.56_____13.4x____5.43%__________$345 mil
David Jones___$4.83_____15.1x____5.60%__________$115 mil
Harvey Nor.___$3.25_____16.5x____3.00%__________$528 mil
JB Hi-Fi______$18.05____16.2x____3.05%__________$47 mil
Radio Rentals_$0.73_____6.95x____6.85%__________($4 mil)


6) As can be seen from the table above, Radio Rentals is expected to have net CASH (not net debt) of $4million on its balance sheet, whilst paying a 6.85% fully franked dividend and trading on a P/E multiple of 6.95x. I know Radio Rentals is smaller when compared to some of its peers, but the discount is so significant that it is not warranted. Given their constant outperformance since listing, I would have expected their share price to trade closer to 9x to 10x forecast earnings, not at 6.95x FY'10 forecast earnings.

7) They have a very strong management team who tend to under promise and over deliver. This has happened everytime since RRA listed.

8) One of the reasons holding back the stock over the past few months is due to the fact that some of the smaller fund managers like Kinetic and Paradice are de-risking their portfolios. Some like Kinetic may have lost mandates and others like Paradice may have had to reduce their overall small cap weightings. This selling is not due to the performance of Radio Rentals. It is more to do with the fund managers and their internal workings. I am not sure how much selling needs to be done in RRA, but given the HUGE disparity between Radio Rental's valuations and the rest of the retail sector, I'm surprised that not more enthusiasm is shown towards the stock.

9) Management expects the new businesses, Big brown box & cashfirst to make a small loss or break even in FY'10. On the other hand, I believe they have a very good chance of makeing a small profit from these 2 divisions in FY'10. We have to remember that RRA sunk up front capital cots in establishing these 2 businesses in FY'09, so I do expect the FY'10 performance to perform much better.

10) I think big brown box is a winner over time. Have a look at www.bigbrownbox.com.au. It includes free delivery Australia wide on goods you buy on the internet. This caters to the market that wants convenience. I know it is not everyone's cup of tea, buying appliances off the internet. That was what everyone thought before Ebay. the difference with Big Brown Box is you have the backing of a major corporate, so you know your warranty claims have more validity. Convenience is something we will all yearn for as society gets more hectic.

11) Yes. I do own the stock and I believe in the company and management. Whilst I know this is not one of those specky higher risk resource plays, I believe this company has value stamped all over it and is definitely one for the bottom drawer.

I'll try to answer any queries if you care to drop a message on this board.

Happy Investing.