HLG - Hallenstein Glassons Holdings

[Basil]

Forbar
Financials: Aug/ 24A 25E 26E 27E
Rev (NZ$m) 435.6 467.5 490.5 515.6
NPAT* (NZ$m) 34.5 42.9 44.6 49.2
EPS* (NZc) 57.8 72.0 74.7 82.4
DPS (NZc) 50.5 61.0 63.5 70.0
Imputation (%) 75 75 75 75

Crikey.Target price $10.00...They are more bullish than Basil...

I must have made a mistake then lol

[lorraina]

I think it is very difficult projecting Glasson's Australian growth,because they state 2 to 5 new stores a year,plus expanding some existing stores,while upgrading others.New store opening timing will govern revenue growth.They also stated growing in states they do not currently have a store,however main growth will come from the east coast of Aussie,including Sunshine Plaza at Maroochydore.
James Glasson was very excited about the prospects of their 30% expansion of their Bondi Junction store.
I may have missed heard him but I think he said another store at Bondi.
The following should go a long way to improving margin,as it should stop losses in logistics and store thief.
No mention was made of store thief,but all retailers are struggling with it.
  "We are also well into our program of
utilising the latest RFID technology to improve our inventory management."

[Basil]

The following should go a long way to improving margin,as it should stop losses in logistics and store thief.

No retailer wants to talk about percentage losses on store theft as its a closely guarded commercial secret, but I think it's significant, what they're doing to reduce or mostly eliminate theft.

I had another look and crunched some numbers for people this morning.
If Forbar are right about their 72 cps, (I think they are a little bit optimistic), and 61 cps in dividends 75% imputed I calculate at $7.50 a forward PE of only 10.4 which is ostensibly a no growth PE for a company that I calculate will have grown earnings over the last 5 years by 72 / 46.5 cps = 9% CAGR.  You're effectively getting all the growth in Glassons Au for free.

Breaking this down into the Au and N.Z. operations.
Assuming all of the growth mentioned at yesterday's meeting pertains to Glassons Au, (and commentary at the meeting more or less hinted at that) ,I estimate FY25 Glassons Au sales of $252m as compared to $96.6m in FY20 a CAGR of 21%.

Where it gets REALLY interesting is in how eps has grown in the Glassons Au division.
In 2023 there were some major changes to head office cost apportionment that people can read about in the annual report if they wish, and while they don't give specific detail on what head office costs were applied to Glassons Au from FY23 onwards I have interpolated data from 2022, 2023 and 2024 to conservatively estimate this at $4m based on the size of the operations in Australia that year and sales of $192m.

Re-working backwards to 2020, sales of Glassons Au were $96.6m and I estimate if the same accounting methodology had of been applied then at least $2m, probably closer to $3m would have been applied to Glassons Au division profit and divisional profit would have reduced by that much.  Sticking with $2m, adjusted eps from Glassons Au in FY20 was 12.3 cps and my estimate of Glassons Au profit for FY25 is 45 cents out of the 72 cents total

On a normalized basis by my calculations after accounting for estimates of head office cost allocation, Glassons Au has grown eps from 12.3 cps to 45 cps in just 5 years, a CAGR of 29.5%!, a rate even faster than the CAGR in sales of 21% which stands to reason with economies of scale.

At $7.50 you're basically getting the amazing growth in Glassons Au for free.  No wonder Forbar are saying they're worth $10.

Further, while we wait for the exciting growth in Glassons Au to continue over the next 5 years were getting, (according to Forbar 61 cps in dividends 75% imputed = 61 / 0.79 = 77.2 cps gross = 10.3% gross yield.

So ostensibly what we have here is a company growing overall eps at close to 10%, while paying a 10% gross yield and its trading on a forward PE of ~ 10 and Forbar saying its worth $10.  Who would argue with that!         
Aren't 4 tens usually a winning hand in poker lol
Crickey...I don't think I have ever seen numbers like this line up for any company.
I'm going with 4 tens; I reckon 9 times out of 10 that's a winner !
Disc: I bought more this morning at $7.55

[winner (n)]

Apparently Glasson mentioned on of the challenges coming up was the potential of US tariffs might bring in

also keeping an eye on unrest in Bangladesh

[Basil]

This morning I have updated my valuation for HLG. I see intrinsic value that correctly encapsulates the phenomenol growth of Glassons Au as being $13.68.

[Dolcile]

 

Jeepers

What's changed?

[winner (n)]

This morning I have updated my valuation for HLG. I see intrinsic value that correctly encapsulates the phenomenol growth of Glassons Au as being $13.68.

Seems about right ...... had to be higher than Forbars conservative $10.00 eh

Where's the BUY button one asks

[Waltzing]

its always been undervalued but R = RISK...

retail is RISK.... but you have to wear something and women dont just settle for home dress making anymore...

https://www.huntsmansavilerow.com/?srsltid=AfmBOoqZdsxtMokPPI6ixcFWlXVU14MANgRtMVX-0-tP1ocA1ZIcs7Pf

the market hasnt priced in its now an AUSSI operation..might as well relist...

in fact how much longer do kiwis want to own assets in ever declining KIWI dollars...

[Basil]

Jeepers
What's changed?

I wasn't at the meeting and when coming up with my previous price target wasn't aware of the accelerated store rollout program of Glasson's Au or the fact that their new store rollout is self-funding, (new store payback period is within a year).

Intrinsic value (https://www.investopedia.com/terms/i/intrinsicvalue.asp ) is different from a specific price target one year hence and Forbar's price target of $10 this time next year makes good common sense to me and if achieved would give a circa 40% return including capital gain and dividends.

All analysts do a five-year DCF model to come up with their valuation, apply a terminal growth rate after that, in Forbar's case 1.5%, and discount that back to net present value applying an appropriate discount rate for variables such as the long term risk free interest rate, in their case, their assumption is 5%.

This does not properly encapsulate the value of the full runway of the growth opportunity in Australia.  Consider this.  Glasson's Au, currently with 38 stores which is a very small number for a market that size, (N.Z. market 34 stores), can self-fund a 10% CAGR in the number of stores in Australia for the next 16 years to end with a target of 175 stores and would still only have the same level of retail footprint for the size of the Au population as Glasson's NZ does now.

Glasson's Au has grown sales at a CAGR of 21% in the last 5 years, (keep in mind that's over the pandemic era).  If that continues for the next 5 years sales there will be circa $650m and combined sales of all other divisions, (Glasson's N.Z., Hallensteins N.Z. and Hallensteins Au) are likely to stay the same in my opinion, currently about $230m.   All other divisions would then amount to just 25% of total group sales, FY25 estimate just under 50%..  That's a huge change.

Through the natural process of Glasson's Au's very strong growth , the handbrake of the no growth divisions will dramatically reduce as a percentage of overall group sales in the years ahead.  That has serious implication for the growth rate of overall group sales and the appropriate PE the market will ascribe in the future.  (Note: We are already at the point of inflection this year when Glasson's Au sales will comfortably eclipse all other divisions combined.).

Given that Glasson's Au will dominate in future years, and we are at the point of inflection now, I have emailed the board suggesting they initiate a dual listing on the ASX.  That way, hopefully, Australian investors may be able to have their dividends franked.  Many Australian institutions are unable to invest without an ASX listing and my contention to the board is with Glasson's Au becoming the dominant position it makes sense to list there at some stage in the near future.

Finally, Glasson's and Hallensteins are very old brands here with circa 100 years and 150 years trading operations in N.Z.
Its clear the market here is saturated with stores.  Glasson's Au is a very young cool brand in Australia, and they are only now starting to enjoy economies of scale there.  $250m sales in Glasson's AU is not huge in the context of the market size there and market penetration in Australia is still very low.

HLG shareholders have a very exciting future ahead of them in my opinion.  That we're being paid a circa 10% yield while all this exciting growth plays out in the years ahead is something I find truly remarkable.   Have people missed the boat at $7.64?.  Not at all, the share price was at this level about 4 years ago in February 2021 when Glassons Au sales were about half the level they will be this year.   I'd better not say any more, stop typing and do more buying lol

[Dolcile]

Awesome write up Basil.

The only part I'd question is.... what are the analysis smoking ...a 5% discount rate is significantly below the WACC used for regulated / monopoly style businesses. 

[Basil]

Thanks mate, that's just their risk-free rate assumption.  They're discounting back using a WACC of 11.2%
Top ten winners and losers for the year on the NZX and some good thoughts for the year ahead, contains quite a bit of commentary on HLG so I decided to post it in here.  Paywalled  https://www.nzherald.co.nz/business/the-sharemarkets-winners-and-losers-for-2024-stock-takes/QR7LSC3JJRCY5KSEX7TRTXJLPQ/

P.S. I was watching CNBC this morning and they had a segment on old fashioned investing for dividend yield.  (as we all know tech stocks are all the rage in the US) The one good point I took from that was look for companies with the real prospects of growing dividends in the years ahead.  The large fund manager they had on there said he looked for companies that were growing dividends nicely and offered at least a 2% dividend yield.  I had a good chuckle about that 2% number lol  He cited Costco as a good example of a great company that can grow dividends very nicely in the years ahead.  On a PE of just under 60 and offering a yield of about 2% that should grow well in the years ahead.    Made for a bloody good comparison to HLG metrics lol
Really emphasizes Mark Listers point in the above linked article that overseas markets have had a really good run whereas the NZX hasn't, and we are overdue for one.  In that article I was surprised HLG was in the top ten performers this year, (no 6) on the NZX with total gains of over 58%.  I think the chances of a repeat of a similar percentage in 2025 are very good indeed.

As mentioned a few times already, my contention with HLG is actually quite simple.  You're getting a company with a well proven track record of growth with Glasson's Au, a group CAGR in eps of 9% over the last 5 years, (Glassons Au CAGR in eps 29.5%), (noting the last 5 years have been extremely challenging), with a very long runway of strong growth ahead, for ostensibly for a no growth PE price based on FY25 forecast metrics.  That says very clearly to me, there's a really good opportunity here for serious market outperformance in the years ahead. 

[Dolcile]

Aah - risk free rate - that makes much more sense - thanks !

[winner (n)]

HLG pride themselves on staying on trend, being agile, high quality fashion, exciting and engaging store experiences, amazing online experience, social media platforms etc etc etc

Has worked with Glassons AU but made no impact in NZ

NZ might be old and mature as Basil points out but you'd think that some of that good stuff would rub off on NZ consumers

Got to be a story here somewhere .....I might need to work out whether it's  marketing / cultural / economic or whatever which works in one country and a failure in another.

Just for interest sake here's a chart showing NZ market share of apparel market as per Stats NZ data (had to guess Hallensteins AU and deduct from reported Hallensteins sales).

Pretty dismal eh ...esp compared to Australia

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[Basil]

Interesting chart, thanks for posting Winner.  My takeaway from that is that the brands are so mature here and the Covid era lockdowns and subsequent recession here has been so severe, (keep in mind many economists have said it's been worse for retail here than the GFC), that relatively poorer N.Z. consumers have started shopping online more with the likes of Temu.  Notable from that chart is that market share was quite stable until the pandemic hit in 2020.   Maybe market share increases back again as cost-of-living pressures come off Kiwi consumers over the next 2 years ?

Gosh, won't the profit for the group be "interesting" when HLG eventually get to a 5% market share in AU !  What are they now, just under 1% from memory ?

P.S. Nice big juicy dividend hit my bank account this morning.  Many thanks to the hard working team at HLG.
No dividend reinvestment program so I've been running my own one this week but got a bit carried away, and have reinvested 8 times as much as the divvy lol

[winner (n)]

Just for you Basil ...Glassons AU market share trend

Not even 1% of total retail clothing sector innOZ .....imagine the potential

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It's 0.9% share basil

It's 0.9% share basil