Why I Think MHJ is a great opportunity!

Hi there,

I have come to the conclusion that I’ll be better at « stock picking » if I write down my thinking before buying parts of a company. Also, by publishing on this forum, I am allowing myself to be judged. And hopefully receive some insight on my thinking.

This is not an « analysis » nor a recommendation, I am no genius nor a pro and have not the pretension to be better than most. Also, I definitely think that you should do your own research as we all have our own bias.

I hope that this little input of mine would engage in quality discussion around the stock.

____

The Company:

Michael Hill (MHJ) is a 290 stores company that sells jewellery at accessible price.

Key points:

— 290 stores in 3 different countries

— 60% gross margin business

— 200,000 plus members from a loyalty program launch in 2019.

— Online sales represent nearly 6% of all sales

— Listed on the NZX (secondary) and ASX (primary)

— 40 years old company

— « New » CEO since 2018.

Short story:

Michael Hill and his wife Christine, opened a jewellery store in 1979 in the New-Zealand town of Whangarei. In 1987, they expand to Australia. They expand to Canada in 2002 (success) and to the U.S.A. In 2008 (not a success). In 2020, the company operates 290 stores in Australia (60% of sales), New-Zealand (20% of sales) en in Canada (20% of sales) employing more than 2,300 people in the process.

Shareholders:

According to their latest annual report, the Hill family still own 86.36% of the company. The fact that they got that much in the company means that they’ll naturally do what they think it’s best to increase shareholders value. Meanwhile they are also prone to cut dividend in periods of uncertainty, even if they got the cash for it. Moreover, the founder’s daughter Emma Jane Hill is the current chairman, and have been for the last 5 years. She is not a boardroom kid, having worked on floors and led the expansion to Canada.

While talking of people who work for MHJ, we better talk about the shares that have been bought as recently as 2020 by directors. Insiders have bought more than 200,000 AUD worth of charges. Meanwhile, none have sold any shares. Directors have privileged views, and have access to executives. What they have seen must have made them believed that they’ll be growth in value ahead.

Financials:

From what I have read (I went to from the 2020 to the 2001 annual report), I can confirm that they have made a profit every year from 1996 to today. In 2020, the net profit was 3.1MF down 80% from 16MF. As you could imagine, COVID has been strong for jewellers, but the management kept the company afloat.

The gearing ratio is negative, which means that they have plenty of cash. Although must of it should have come from government plans to help during Covid times. But... it’s something! Can’t be bad to have that much cash.

Value:

At a P/E of 12.90 it’s way lower than the sector average of 25.19 (has seen on CommSec). If we were to apply the average P/E RATIO, shares would be trading twice the time higher at 1.3.

At a P/B of 1.73 it’s also way lower than the extravagant 20.25 of Lovisa (LOV:ASX).

I compiled in this chart what I have found on the NYSE (as far as I know, LOV:ASX and MHJ:ASX are the two companies that trades on the ASX that are jewellery related - could be wrong).

	COMPANY	P/B
1	BIRKS (BGI:NYSE)	47.28
2	MOVADO (MOV:NYSE)	1.23
3	TIFFANY & CO (TIF:NYSE)	4.78
4	ENVELA (ENV:NYSE)	10.69
5	SIGNET JEW. (SIG:NYSE)	2.320

COMPANY RELATED TO JEWELLERY TRADED ON NYSE

As we can see, even if MHJ would be trading at 1.3 AUD, it would be well below industries « standards ».

The reason for that under-appreciation I think is « overlooking »:

— Not many comments or article on this forum

— Not covered by many analyst

— Must be « too small » for pension funds

— Volume are « too small » for day-traders

Charts:

As I have not master the dark art of charting, I’ll try be humble and only talks about the obvious:

— Upward trend (since march 2020)

— Low of 0,22AUD in march 2020

— High of at 1.72AUD in September 2016.

Since 2019

Since 2016

Future:

Half-year results are due in February 2021.

According to the Australian Bureau of Statistics, the number of weddings fell by more than 30% in the first six month of 2020. (Full year statistic not available). We can hope that wedding rings and other alliances not bought then, would be in 2021 (or when we’ll be done with Covid 19).

Michael Hill’s loyalty program is a strong element for future growth. It will entice customers to shop more at Michael Hill. In parallel, their online website should give a clear direction of where to expand next.

Michel Hill’s partnered with an independent company to « recreates » diamond. My guess is that they would be less dependent of wholesalers, would be able to increase their gross margins and it will please greens by offering a more sustainable solution to mining diamonds. Could you imagine if TEXACO could creat its own petrol?

Mr. Market, could also choose to look at this undervalued stock and pump it to a more realistic 1.3AUD. This could happen quickly or take years... But I believe that it will happen eventually.

Have a good week-end!

References:

https://www.marketbeat.com/stocks/ASX/MHJ/insider-trades/

https://investor.michaelhill.com/static-files/9960caee-ef2e-410b-8f6e-6ddcfef8c174

https://investor.michaelhill.com/static-files/ef421aa8-72aa-45f0-b552-743ce4b9e50b

https://www.ragtrader.com.au/news/michael-hill-launches-lab-grown-diamonds

https://en.m.wikipedia.org/wiki/Michael_Hill_Jeweller

https://ycharts.com/companies/BGI/price_to_book_value

My Brocker: Commsec