Rapid rise in SP so the question is why? I think the answer lies...

Rapid rise in SP so the question is why? I think the answer lies in the numbers the desk jockeys with Excel spreadsheets are starting to crunch. Lets make a few assumptions and see what we get.

I will be conservative with store numbers. TRS finished the year with 335 stores – lets keep it at this number (even though they will add 9 more in the year). Lets say in the 1st half we have a sales increase of 3.0% per store (not unreasonable given the comments at the AGM) this equates to a 1st half sales number of $432.3m or a sales increase of 7.5%.(this seems high but we only had 321 stores in the 1st half of 2015 so we are now getting the full 12 month benefit). Same logic with the 2nd half. 3.0% increase per store gives us a sales number of $365.2m for the second half. This makes total sales for 2016 of $797.6m (up 5.4%). I am sure the number will get to $800m given the extra stores plus corporate ego - but lets leave it at $797.6m.

So the question is what will stick to the bottom line? The business wore $3.6m of a full year $3.8m of store opening and refurbishing costs in the 1st half 2015. This cost will be significantly less in the 1st half of this year. On the flip side the business will be experiencing exchange rate head wins but they are doing a lot of supply chain and cost of doing business projects which should deliver savings. Lets say the margin sneaks up to 3.5% - still very conservative IMO and does not reflect the full effect in savings of refurbishment costs etc. So profit for the 1st half will be $15.1m or $2.8m (18%) above the 1st half of 2015.

A similar story is also at play in the 2nd half of this year. As far as I can determine the company wore the full cost of store closures in the 2nd half accounts. I can not find any reference of the $3.3m charge in the 1st half number. Given this and the time element of savings benefits I do not think it is unreasonable to have a margin of 2.0% in the second half (if you cant make 2 cents stick in every dollar then why in the hell are you in business for?). This is well up on the miserable 0.4% in 2015. This would deliver a NPAT of $7.3m in the second half – well above the underwhelming $1.4m of last year.

So for the full year sales for 2016 would be $797.6m with a NPAT of $22.4m (margin of 2.8%). This represents earnings of approx 77.2cents per share. If the PE multiple stays around 17 then this represents a share price of $13.12. So maybe that’s why we are seeing the rapid rise in share price. The CEO looks like he is delivering, the spreadsheets don’t lie and the market is starting to recognise how undervalued TRS is. So all good IMO.

Cheers

SLC