OPINION: Truworths seems to be fair value
According to Bloomberg, it is the largest outflow for the corresponding period since it started compiling the data in 1999. This means that local investors drove the recent gains on the JSE. It is a known fact that foreigners love our retail stocks and that they are uncertain about the coming election. If they do decide to return to the JSE, there is no doubt that a company like Truworths will be a beneficiary.
Truworths in South Africa contributes 73percent to revenue and almost 90percent to profit before tax, while Office (in the UK) contributed 27percent to revenue and 10percent to profit.
The Truworths division includes names like Daniel Hechter, Ginger Mary, Glamour, LTD, Earthaddict, Uzzi, Naartjie and Loads of Living. For the interim period to December 31, 2018, sales increased by 2percent. Locally, cash sales compromised 30percent of sales while all of Office sales are in cash. Gross profit was mostly unchanged and gross margin stable at 52.30percent, within the target range of 51percent and 55percent.
Diluted headline earnings per share decreased by 5percent, and the interim dividend declared fell by 5percent. The quality of the receivables book has incrementally improved due to the maintenance of strict credit lending criteria.
Truworths continues to appeal to the market, specifically the young market, as approximately 50percent of account applicants are under the age of 30, and about 25percent are under the age of 25. The number of active accounts increased by 3.70percent to 2688 accounts, translating into an increase in account sales as a percentage of retail sales of 70percent.
In South Africa, the trading environment remains challenging due to subdued economic growth, low disposable income because of higher fuel and energy prices together with a VAT rate increase, a weak and volatile rand and high unemployment. Retail sales and consumer confidence are also affected by load shedding. There are concerns regarding the short-term earnings outlook and the deterioration in the TransUnion Consumer Credit Index in South Africa, implying a slowdown in credit sales, which is the primary driver of sales. Truworths stated that it has not seen these concerns play out in its credit portfolio.
In the UK, the retail environment is also harsh. More than 1000 fashion retail stores closed down, retail footfall decreased by 2.60percent and growth in sales was mainly online (which is now accounting for roughly 20percent of all UK retail sales).
Truworths is a quality retailer with consistently high operating margins, historically strong cash generation and a very high return on equity of around 25percent and an ungeared balance sheet. The UK business, Office, provides the group with the ability to increase its operational diversity. But trading is proving to be tough due to the complications surrounding Brexit.
The group remains committed to navigating the challenging macro environment by containing costs, improving the fashionability of merchandise and conservative growth in trading space. This should enable it to sustain earnings growth in the medium-term. These concerns seem to be fairly reflected in the current valuation multiples, the share is trading at a discount relative to its historical averages and peer multiples. Trading at a forward P/E of 12 times, the share seem to be fairly valued.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Truworths shares are held on behalf of clients.
BUSINESS REPORT
Source: iol.co.za
