Having dropped almost 35% from $0.95 when I looked at it at the end of December to $0.63 today, and having thought back then it was probably reasonable value, surely now it’s a buy!

Well, let’s update what has happened since then:

• At the end of March AX1 was removed from the S&P/ASX 300 Index. This is a near‑term weight on the share price, and not normally a fundamental value adjustment unless they need more capital or it impacts the ~$100m debt (I don’t think this is the case).
• 1HFY26 accounts: The market seemed to like them, driving the price up from $0.83 to a high of $1.227 by the second day, a massive 48% increase. More on this below.
• War in Iran and petrol uncertainty and price impacts: The market has not liked this factor at all, with the price dropping almost 50% from 28 Feb, as discretionary retail is threatened by further cost‑of‑living pressure and global trade uncertainty.

The 1HFY26 result was relatively solid once you looked through working capital timing, FX impacts, and the OzSale and Glue business impacts. Owner earnings (FCF adjusted for working capital movements) were better half‑on‑half, as per below. So, cutting through genuine one‑off costs and timing issues, the business is tracking okay – it’s no moonshot, but this is not a business in trouble (like KMD).

The rotation from franchise to owned stores is progressing well, with another nine stores transitioned, but retail conditions continued to be described as challenging and that is before the Iran war. Soft margins as a result of discounting are the most significant concern, but FX played into this also and rates have since improved. I didn’t expect the price to drop below $0.90 for any sustained period, but that was pre‑Iran war.

However, even including the war, a PE of under 10 the current price is looking very attractive despite the uncertainty, if you think it will come out the other side in much the same shape. It’s a business that adapted and did well during COVID and seems to rise to a challenge. They continue to proactively manage store network performance, closing underperforming stores and, in the case of underperforming businesses, killing them quickly, as they did with MySale.

In theory, the dividend yield is quite high at 7% (10% including franking credits) at the current price, but further cuts to the dividend may occur, so I would not be buying expecting dividends.

The risk is that this is a value trap, and value will continue to improve (i.e. price drop) closely followed by dwindling earnings performance in a downward spiral, which KMD Brands seems to have provided a stunning example of how bad it can get (the outcome of which has probably also impacted the AX1 share price – halo effect). However, they are generating good positive cash levels (6.4c cash per share owner earnings in H1), debt is at manageable levels even with a downturn, and they have a partner to help capitalise new growth opportunities in Sports Direct over the medium term.

At this price I see a reasonable asymmetry in likely outcomes, but am only looking for a small position due to limited upside from long‑term growth rates. I think a value range between $0.60 and $1.20 per share (PE 10 to 20 on current earnings, average PE of ~17 over last decade) based on current conditions covers most outcomes, assuming reason eventually prevails in Iran the downside is limited, and upside is limited while cost‑of‑living pressures persist and network growth is slow. Upside could be significant if we get a reversal of sentiment, PE re-rate and lift in earnings compounding for an opportunistic exit, but long term I would expect modest market plus a little returns.

Disc: I don’t own but may buy