HLG - Hallenstein Glassons Holdings

[Dolcile]

It was a throwaway comment by KW and she never named them but for what its worth I reckon there are more than 5 but the trick is to find a few with genuine growth prospects that are priced on compelling metrics. GARP stocks, (growth at a reasonable price).  This and TRA fit the bill nicely in my view and SUM will too if the property market can get going properly again.  Others love the growth story of IFT, MFT, FPH, EBO to name a few, arguably all of which are already priced for perfection or very close to it. 

Thanks Basil.   At 7.80 do you still think HLG is compelling value?

[Dolcile]

HLG looks like a remarkable well run business when you see there is only 2 months of sales sitting in inventory 

[Basil]

Thanks Basil.  At 7.80 do you still think HLG is compelling value?  Dolcile

Thanks, Dolcile that's a very good question considering it just hit a new all-time high after a very nice run up over the last 8 weeks or so from the low $6 range, (please see the excellent discussion and contributions from several well-respected posters on 1 October on this thread if you haven't read them already). 

I don't think there's any question it was a truly compelling buy in the low $6 price range, and I made the case you are ostensibly buying a well proven growth company on no growth metrics which made no sense to me whatsoever, so I actioned a significant acquisition program accordingly which ironically enough only finished off yesterday with a very small top up at $7.80.

So how much are you paying for the growth now? is a very timely and pertinent question.

In posts on 1 October, among many other points I made which I won't replicate in this post I made the case that eps has grown at a 10% CAGR overt the last 7-8 years.  Just unpacking that a bit more as I think it's worth highlighting what an achievement that's been over the last 5 years in particular as retailers have struggled against unprecedented headwinds from firstly the pandemic and more recently, the flow through economic effects from that with very high interest rates causing a prolonged recession here and cost of living crisis on both sides of the Tasman.

Can that 10%, (or something similar to that), CAGR in eps growth rate continue in the years ahead?
While no one can say with any degree of complete certainty we won't face some new exogenous shock, I think on the balance of probabilities its very unlikely the huge challenges of the past 5 years, (a perfect storm for retail), will occur again in the foreseeable future.
Tailwinds appear far more likely from declining interest rates and hopefully N.Z. economy will finally emerge from what feels like 5 years of either no growth or recessionary conditions.

The growth at a reasonable price (GARP) primary valuation yardstick I have used to great effect for more than a decade now is GARP stocks are a compelling buy when you pay a no growth forward PE of 8.5 + 1 extra PE for every 1% expected growth rate in eps over the next 7-10 years.  This is a derivation of the Ben Graham formula where he used two times the growth rate based on historical eps.  My yardstick is far more conservative than his was and on my yardstick a lot of companies like FPH for one example look terribly overpriced.

So the next question is what their growth rate could be for the next 7-10 years?
My view on this as hinted at above is that to grow eps over the last 7-8 years at 10% CAGR is a tremendous achievement given the extreme headwinds faced in recent years.
All of the growth is earnings has come from Glassons Australia which has quadrupled sales over that timeframe.  In my view, the N.Z. market is saturated with Hallensteins and Glassons stores and there has been no growth here for over a decade and there's unlikely to be any in the next 10 years.  Important to understand these brands and businesses are very mature here and have been trading for over 100 years.

In contrast Glassons is a young and fast-growing brand in Australia with sales growing at a very solid pace, very low market penetration with only slightly more Glassons stores there than in N.Z. despite the vastly bigger market, about 6 times the size from memory.

No question James Glasson is doing an exceptional job growing their market presence in Australia and there's a very long runway of growth there extending out several decades in my opinion.  With sales more than quadrupling in the last 7-8 years they have now achieved critical mass with over $200m sales there and with new distribution centers are very well placed to grow and enjoy economies of scale as they do so.

James is well qualified, (degree qualified from the London school of fashion), now has a proven track record of leading very strong growth in Australia and there's a massive runway ahead for growth in the decades ahead.  Additionally, he's obviously highly motivated and probably stands to inherit a decent chunk of Tim Glasson's 20% stake presently worth north of $90m.

I started getting really serious about building a retirement income about 13 years ago when I turned 50.  HLG presented to me in August 2016 as a classic dividend hounds stock.  At the time, from memory, it was trading on a no growth PE of about 8.5 and a gross yield of 15%.  There was fierce debate on the other forum at the time as to whether HLG faced an existential crisis from new retailers like Zara and a host of other brands I forget as well as an increased propensity for shoppers to shop online.  I made the case at the time that most people want to try clothes on to see if they fit properly, the feel of the fabric and the style to see what they look like on their body.  I stand by that thesis today.  My belief at the time which still holds true today was that HLG has an exceptional track record of dividend payments stretching a long way back over time and it could be relied upon to be a very reliable high dividend earner going forward.  That's certainly been the case.  What I never imagined back then, because there was no track record of strong growth in Australia with Glassons and I was only buying for the exceptional 15% gross yield, was that the share price would nearly triple from $2.75 over the next 8 years.  Its fair to say HLG has been a wonderfully successful company for me with not only exceptional and highly reliable dividends but also tremendous capital gains.

I believe they are very well positioned to continue their track record of the last 8 years of strong growth in Australia over the next 8 years and beyond.
My base case is I think on average their eps growth in the years ahead will be similar to what its been in the past.  I think mid to late single digit eps growth is most likely over the next decade.  If I draw a line in the sand and call that number 7% eps growth, (compared to 10% in the last 8 years) that suggests to me the shares are worth at least a forward PE of 8.5 + 7 = 15.5.  Market evidence.  I think the best comparison here is Briscoes which I note trades on a historic PE of just over 15 but does not have any growth prospects in Australia so its very easy to make the case HLG deserves a materially higher PE than Briscoes.

So where does the current pricing suggest the forward metrics currently are?
Firstly, I would make the case that someone bringing fresh capital to the table today has not owned those shares in FY24 and is best to treat the dividend due in the next few weeks as a partial return of the purchase price when looking at the metrics for FY25 and beyond.  Ignoring the slight tax impost of the looming dividend as its ~ 76% imputed the net share price for FY25 earnings and dividends and beyond becomes $7.80 - 26.5 cps = $7.54.

I have recalculated Forsyth Barr's forecasted metrics below based on a share price of $7.54 compared to their calculations which were based on a share price recently of $6.40.  Updated forward metrics for FY25, FY26 and FY27 at $7.54 in bold green

Forsyth Barr update out today.
Financials: Aug/ 24A  25E  26E  27E
Rev (NZ$m)      435.6 459.5 475.6 494.0
NPAT* (NZ$m)    34.5  39.1  40.0  42.5
EPS* (NZc)      57.8  65.6  67.1  71.2
DPS (NZc)      50.5  56.0  57.0  60.5
Imputation (%)  75  75    75    75

*Based on normalised profits
Valuation (x) 24A 25E 26E 27E
PE            11.1  9.8  9.5  9.0  FY25 11.5 FY26 11.2 FY27 10.6
EV/EBIT        7.2  6.5  6.3  6.0
EV/EBITDA      4.2  3.9  3.7  3.6
Price / NTA    3.7  3.4  3.2  3.0

Cash div yld (%) 7.9  8.8  8.9  9.5
Gross div yld (%) 10.2  11.3  11.5  12.  FY25 9.7  FY26 9.9 FY27 10.3%[/color]

All figures based on yesterday's closing price of $6.40.

Target price: Increased +5% (NZ40 cents per share) to NZ$8.30
Rating OUTPERFORM

Emphasis added. Gosh look at the future gross yields, 11.3% gross forecast for the current year FY25 !  A dividend hounds sheer delight...better watch my weight, you can get bloody fat when being fed that well lol   

I think you can see I still believe the metrics on HLG are really compelling.
Its an exceptionally rare thing to be able to buy a company with such a proven history and such excellent growth prospects in Australia on such compelling metrics.
Lastly, I really like the way they have gone about their growth ambitions, slowly, methodically and with no debt.  Indeed, HLG have never been in such a strong position to continue their growth journey while contemporaneously paying high dividends.  They have no debt and about 75 cps of cash in the bank which is the highest level of cash in the bank they've ever had.  HLG's resilience in the last 5 years in the face of extreme economic and pandemic headwinds has been exceptional and right in line with Turners exceptional track record, (my biggest NZX holding, HLG, a very close second)

[Dolcile]

Basil, that is a phenomenal response and I thank you for putting the time into so clearly articulating your thoughts.
Off to do more of my own research.

thanks again.

[Basil]

You're most welcome Dolcile.  I think I put so much effort into it because of my long and successful history with HLG, (who doesn't enjoy reminiscing a bit about one of their most successful investments lol), but also more specifically, to double check I didn't pay too much for the last top up at $7.80 yesterday lol.  Any more questions in due course after you've done more research, I'm happy to answer and share what I know.
I think I might have talked myself into getting a few more HLG in the near future lol

[Dolcile]

Basil, one initial question.

I understand HLG don't fully impute dividends. That strikes me as a little unusual, and I'm wondering why they aren't generating enough imputation credits?  Is that because they are paying out dividends ahead of (or greater than) the taxable profit.... which would seem odd to me because with growth a certain amount of profit would need to be retained for investment and working capital.

[BlackPeter]

Basil, one initial question.

I understand HLG don't fully impute dividends. That strikes me as a little unusual, and I'm wondering why they aren't generating enough imputation credits?  Is that because they are paying out dividends ahead of (or greater than) the taxable profit.... which would seem odd to me because with growth a certain amount of profit would need to be retained for investment and working capital.

Problem of earning money and paying taxes overseas.

Don't forget that a good chunk of their earnings comes from Australia, which means they pay over there as well taxes (nice for the West Island, isn't it?).

They can't give their New Zealand shareowners imputation credits for taxes they paid in Australia. However - if you move to Australia, you might be entitled to Franking credits on that bit (though I doubt you could keep the NZ imputation credits in this case. In essence - IRD is always winning.

[Basil]

Quite right BP.  Dolcile, its's all about the moderate level of profits earned in N.Z. and the fact that tax paid in Australia on Glasson's Au profit cannot be used to impute dividends here.  I doubt the double tax agreement between Australia and N.Z. will ever allow reciprocal franking and imputation credit entitlements.  As you suggest BP, one thing that might make HLG far more attractive to Australian residents is a dual listing which would enable dividends to be partially franked to Australian residents.
The gross yield posted above at the current price of 9.7% for FY25 and growing thereafter, assumes imputation credits are available to 75% of the maximum level.  Whether that's a safe assumption going forward, only time will tell but I am hopeful with the N.Z. economy surely due to recover from an exceptionally long period of very strong headwinds, hopefully trading conditions for Hallensteins and Glassons N.Z. will improve somewhat in the years ahead allowing future dividends to be imputed to a satisfactory level.

I expect the term deposit rate this time next year to be in the range of 3.5 - 4.0%.  9.7% gross yield for HLG will look exceptionally good compared to that !

[Dolcile]

Thanks both, that makes a lot of sense.

[Popeye]

Out of interest, what were the five stocks?

I wondered about that too.  It is easier to come up with a list of heart attack stocks on the NZX.  Here are a few businesses that strike me as well run.  I would be happy to have any of these in my portfolio, at the right price of course.

Hallensteins (for all the reasons Basil listed)
Briscoes
F&P Health
Mainfreight
Infratil
Skellerup


Possibly Vulcan Steel too, but too early to say for sure.

Ryman used to be very highly regarded, but seemed to lose their way

Turners I do not know well enough.

Interested what others would add or debate

[Dolcile]

Managed to pick up some at $7.40 which was nice.

[winner (n)]

Aust retail sales out for October from ABS

Clothing stores sales up 4% on last year

Glassons share gains should mean sales up by heaps more

That's pretty good

Looking like a pretty good update at AGM next week ...could be exciting

[Waltzing]

how do they do it!

cant be true... it must be fake news...well it is the official Aussi numbers site...

is Aussi about to go shopping mad then they finally lower the ocr arrhh!

it will be GO you Good things! Its aussi shopping time...

Will china stimulate there economy and buy lots more stuff from aus.. like high quality grade ore... no wait they can always recycle all those empty cities...

[Basil]

Might fly down to Chch next December for the AGM to celebrate it hitting $10.

[winner (n)]

A while ago they said 'The first eight weeks of the new financial year have seen Group sales improve by +10.9% on the prior corresponding period. The result to date is driven by good performance from the Australian market, although cycling a negative prior corresponding period, and is not indicative of expectations for the peak trade period to come. The environment in New Zealand remains more challenging as the current economic conditions and cost-of-living pressures continue to impact on consumers spending habits across both brands.


Next week I reckon they will say 'The first eighteen weeks of current financial year have seen Group sales improve by 9.0% on corresponding period. The result is driven by good performance in Australia and we are seeing signs of better market conditions in New Zealand'