Significantly undervalued

Despite Joyce's ("JYC") share price appreciating by 100%+ from its March low, the market continues to do a poor job at reflecting the true value of this company. In my opinion, on a sum-of-the-parts ("SOTP") basis, JYC is worth somewhere between $85 million (approx. $3 /share) and $120 million (approx. $4.40/share), representing further potential upside of roughly 80% - 170% from its current share price of $1.65.

Based on its current price, you're paying $46 million ($1.65 x 28.1 million shares outstanding) for a company which owns the following assets (figures as at 30 June 2020):

- $8M in net cash -- ($11m cash + $3m Lloyd sale proceeds - $6m debt) [note: obviously, given the company has paid (or will soon have paid) 10 cents per share in dividends (or <$3 million) since the beginning of FY 2021, the cash balance will currently be lower than the stated $8M. However, given the company has received JobKeeper ("JK") payments up until the end of Q1 FY2021 and also a strong trading period for KWB Group for H1 FY2021 (this is my expectation), I would assume that net cash would be roughly equal to, or greater than, $8 million as at 31 December 2020 when the company reports its half year results.]

- $15M in real estate -- (owns corporate HQ in WA [carried at book value] + commercial property in QLD [measured at fair value])

- $20M - $30M Bedshed -- JYC owns 100% of Bedshed which reported EBITDA $5M in FY 2020. I would think that FY 21 results would most likely be lower than LY given almost 1/3 of its store network is in VIC and therefore franchisees not trading for the first 4 months of this FY. However, in saying this, locations in other states would (I suspect) continue to benefit from elevated levels of consumer spending as a result of government stimulus. This is a decent business and could probably fetch between 4 - 6x EBITDA in private markets considering similar businesses currently trade for 8-10x EBITDA in public markets (e.g. Adairs 9x EV/EBITDA, Nick Scali 10x EV/EBITDA, Harvey Norman 8x EV/EBITDA, etc.) and a few private market transactions have sold at similar multiples as well.

- $45M - $75M KWB Group -- This is the crown jewel of Joyce, its 51% stake in KWB Group (operator of Kitchen Connection and Wallspan Kitchens & Wardrobes). This is a high quality business with highly lucrative unit economics (e.g. new showroom = payback period <1 year or ROIC 100%+, avg. showroom T/O $3M+ & EBITDA $700K p.a.) and long runway of organic growth opportunities. A business of this quality may realistically sell for anywhere between 6-10x EBITDA in the private markets. As a reference point, a similar, albeit much larger and mature, business which is based in the UK, Howden's Joinery (LON: HWDN), currently trades at TTM EV/EBITDA 12x.

The below summary is not meant to be a precise valuation of JYC but rather a back of the envelope calculation to illustrate that the company is materially undervalued by the market. You don't need to weigh an obese person to know that they're overweight, likewise, you don't need to be precise with valuation to know when a company is significantly undervalued.

		A$M	Valuation method / calculation
1	+ Net cash	8	Book value
2	+ Real estate	15	Book value + Fair value
3	+ Bedshed (100% ownership)	20 - 30	4 - 6x EBITDA ($5m x 4-6)
4	+ KWB Group (51% ownership)	45 - 75	6 - 10x EBITDA ($15m x 6-10 * 51%)
5	- Minority interests	(4)	Book value
6	Equity value	84 - 124 ($3.00 - $4.40 / share)	SOTP

Risks

In my opinion, I believe the main reason why its shares trade at a large discount to underlying value is due to the company's size and it being underfollowed and under-researched as a result. Another reason may be that the company's growth strategy revolves around acquisitions which in many cases often leads to value destruction, rather than value creation for shareholders. As an investor in JYC, this is my biggest concern and I would much rather see management continue to run the business as is, not make any further acquisitions, and return all excess cash to shareholders via dividends or share buybacks when its stock can be acquired at a large discount to intrinsic value.

I'm generally very sceptical of acquisitive company's, however, JYC's management appear to be both disciplined with valuation and patient with their approach. For example, the partial acquisition of KWB Group in 2013-2014 for $900K was a home run for the company, being highly value accretive for shareholders over the past several years. As highlighted above, I think that it's highly plausible that the original $900K investment in KWB Group is probably worth somewhere between $45 million - $75 million today. Management have also transacted in a number of highly profitable real estate deals over the past decade. Finally, the company's most recent acquisition of Lloyd's back in July 2016 suggests that management seem to prioritise the importance of finding the right acquisition as opposed to making an acquisition for the sake of making an acquisition.

Catalysts

In my mind there are three potential catalysts which would lead to a partial or complete realisation of value:

1. Announcement of share buyback

2. Sale of operating businesses & real estate holdings, distributing proceeds to shareholders

3. Continued strong trading performance by operating subsidies, leading to increased shareholder returns via dividends and increased investor attention