Pinned straw:
Thank you @DrPete for your kind words and your views on the future for Nick Scali.
After reading your straw I am starting to think that perhaps I have been too bullish with my valuation? Perhaps assuming a 5 year ROE of 40% might be a little too high?
Retail is definitely not out of the woods yet and I agree Nick Scali is in for a lower NPAT in FY24. I think in the short term putting a valuation on Nick Scali is a bit like gazing into a crystal ball. We’ve got to make some assumptions about the economy, interest rates, consumer sentiment, the housing cycle etc etc.
Post results, the brokers are starting to adjust their earnings forecasts and the 12 month price targets are starting to come through.
Taking a look at the 12 month price targets on Simply Wall Street the consensus for 7 analysts is $12.44. However, there is not much agreement here with the most bearish at $9.70 and the most bullish at $15.84. That puts my valuation of $16 in the bullish camp!
Source: Simply Wall Street (14/08/23)
The consensus earnings forecast for FY24 from six analysts is $69.3M, climbing up to $88M in FY26. Both significantly less than the $101M just announced for FY23.
Source: Simply Wall Street (14/08/23)
There is a large variance in earnings per share forecasts between analysts. Looking at forecasts from 5 analysts for FY25, the average is 98cps. However the highest is $1.18 per share and the lowest is 85cps.
This is how the variance looks graphically.
So this tells me there are probably too many variables for anyone to forecast Nick Scali’s earnings over the next few years with any degree of certainty.
I think the share price could vary wildly over the next 2 to 3 years depending on sentiment towards discretionary retail. I think there is likely to be trading opportunities for Nick Scali shares over the next few years. However, five years down the track I don’t think I want to be short on Nick Scali shares.
There has been some discussion on Strawman lately about when to Sell a stock. I think we currently have too much Nick Scali in our IRL portfolio (over 10%). For us, the higher the share price goes the higher the risk of holding it becomes. There is a risk of seeing potential profits evaporate! So if the stock approaches $15 to $16 per share I will most likely lighten off some shares and balance out our portfolio (unless there is some unforeseen good news about the economy and the housing cycle which Nick Scali will benefit from).
Similar to @DrPete, our cost base is $9.93 per share, so we could take some profits now. So you could say I am both a seller and a buyer of Nick Scali, a long term BULL and in the short term I’m CAUTIOUS. However, I can’t think of a better stock to get caught holding with a 5 to 10 year time horizon.
So we are holding too much Nick Scali in our portfolio at the moment and we have an opportunity to balance it out and take some profits now. But look at the chart!
I don’t claim to be an expert chartists, but I know enough to know this is not the time to lighten off. I will most likely hold until the MACD heads in a negative direction, then lighten off some of our holdings.
@mikebrisy, I wish I found selling a simple process. For me it is very hard, especially with a wonderful business like Nick Scali! :)
This company has more than earned any premium attributed to it. Even the current result is creditable under the circumstances - a downswing in the cycle is inevitable, but it pays to invest "through" it with a company like this.
This is some of what two of the brokers have published post the recent NCK results
Macquarie:
- NCK FY23 NPAT +4% ahead of Macq. expectations, largely driven by a strong GM% supported by Plush synergies and lower freight costs
- Written sales declined -16.2% YoY in 2H23, albeit with Jun-23 recovering to +4.5% vs pcp
- While we forecast a sustained increase in GM% from FY24, we continue to expect macroeconomic headwinds. Retain Neutral
- Earnings changes: EPS changes of +3%/+1%/+0% in FY24/25/26E driven by an assumed improved GM% on an ongoing basis
- Valuation: TP to $12.20 (from $11.30) based on a blended DCF and multiple valuation. DCF increase driven by earnings increases from improved GM%, particularly in outer years. Multiple is based on FY24 EBIT, at a EBIT multiple of 9x (unchanged)
JP Morgan:
Nick Scali’s FY23 result was well received, with the share price rallying by 13.3% (ASX200 -0.2%) as the result was delivered slightly above consensus (EBIT 3.3% ahead, NPAT 4.4% ahead). Consensus FY24 and FY25 EPS upgrades of 6.5% and 4.0% overnight are significant, as the FY24 re-rate from 13.1x to 13.9x reflects the stronger momentum and less downside being priced into consensus expectations. The -8.1% YoY July written orders trading update implies an acceleration in underlying sales momentum from +6.5% p.a. in FY23 to +10.9% in July 2023 (see chart of the day). Gross margin was also a positive, +250bps overall on lower freight costs and Plush synergies (ex-Plush GPM still up 120bps YoY)
J.P. Morgan view: Nick Scali’s result could be a bellwether for housing-linked retailers over reporting season, as sales and earnings are delivered broadly in-line with consensus with better than feared trading updates, driving a multiple re-rate from relatively low levels as macro indicators around housing continue to improve (house prices, new listings, RBA rate hike expectations, etc.)
@Rick and @DrPete, I've just built my $NCK valuation via DCF. Haven't fully audited it or run scenarios yet. Will publish my valuation when I have.
In my case, I am getting $13.20 in a preliminary low scenario that has -10% revenue growth in FY24 before growth resuming at 5% p.a. The high fixed costs for CODB and leases drags NPAT down (per the points made by @Strawman) to $68m in FY24 and $77m in FY25 - which are actually bang in line with consensus,... no accident because I wanted to see what assumptions I need to replicate consensus.
So, I'm pretty confident my EV (expected value) is going to be in the range $15-16, and my full range considering reasonable scenarios (retail armageddon not one of these) likely to be $11-$17 (finger in the air, based on a few "what-ifs" I've already run.).
I think what is going on is that valuations are anchored in the consensus of what lies ahead for the next year - which is reflected in the overall depressed p/e of the retail sector. (Time horizon arbitrage.)
$NCK is not one stock I believe I need too spend much time thinking about selling. The time for that will be if there is over-exuberance when we are on the other side of this cycle.