Pinned valuation:
(07/2024)
Any one else still holding a candle (boom-tish), or should I say bag, for dusk?
Some great posts before from @Rick and @Dominator and others on reasons for selling. I've been a little too stubborn to sell at these prices, so while I've been too shy to add more, I've held on.
The recent update on the second half looks encouraging based on just the cash and inventory position. Over the last 12 months, which have not been good for discretionary retail, the business has added ~A$4m to its cash position (~20.8m) and paid out about A$3.4m in dividends.
The market cap at ~80c is near enough A$50m, so assuming no other significant balance sheet items occurred during the year (there may have been some cash costs for store closures etc that I'm simplifying) the business is trading on a price to free cash flow (after tax) of about 7 times. If you do it on an EV its only about 3x.
I was nervous about the change in management, but so far, Vlad and the new team seem to have navigated the tough environment well - and he even bought a few (5k shares - so few is generous) on market recently. There is no sign of heroics, which is not what the business needs at the moment.
I've updated my DCF and lowered the price target - which in hindsight was wrong (they all are - but this one more than I'd like!). I've lowered the long term NPAT margins to 6%, which is a little higher than this year but I don't think unattainable. I've reduced the revenue growth over the long term slightly. I think my biggest mistake previously in putting a valuation of 2.60 on dusk (see below) when a recession was likely coming was to think that it could survive the downturn and get back to realising full long term value without a takeover. I think now that its shown it will survive through this downturn, PE will try take it out - and get it. I take the point about PE avoiding due to limited growth, but they don't have to flip it, they might choose to hold it as a cash cow even without much growth. There's not a lot of risk if run conservatively if you can pick it up for A$100m or less, with such a clean balance sheet and no committed investments.
My revised DCF valuation target comes out at $1.78 per share, I'm valuing it at $1.40 because I think it will get taken out about there.
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(2022)
Valuation of $165m from DCF, which off a base of 63m shares gives a per share valuation of $2.60.
I have allowed for some revenue and margin erosion in the coming years due to the economic outlook and the fact that despite being an "affordable luxury" and well managed (IMO) dusk would likely be impacted.
I take revenue down by 10% each of the next 2 x years and then hold it flat until 2026. It resumes growing at 10% pa from 2027 for a few more years but reaches a terminal revenue of about $180m by 2031. I think this is conservative given the history of growth, long term expansion plans in NZ/UK and the fact that it could easily fund that growth via cashflows and its current cash hoard (which is approaching 20% of Market cap at 21.5m).
I've assumed that margins are squeezed over the near term too but particularly in 2024/25. If this happens it might fall further and will require some fortitude to hold. From 2027 NPAT margins are back around 13% where they were for FY22 (19% in FY21, but that was a boom year with COVID).
I've valued the cash at face value, I think that's conservative given I've only factored in limited growth.
I've used a 10% discount factor
Disc: I hold this in real life, am sitting on a loss and plan to buy more.
While I got burnt by this one hasn't stopped me watching in case of an opportunity but I still think there isnt much value to be had. The trading update wasn't great in my opinion. Sales down 8% and NPAT will be in the range of $4-5mil. This is a contraction of the business that doesn't appear to be changing. The figures for inventory and cash require the complete balance sheet to understand what these figures mean. Also the first sales for the year shouldn't be seen as an indicator for how sales are going as the result was due to the release of a popular product that is a limited release.
I think Dusk can expect a PE of 8-10 at best given the type of business. Given $4.5m profit plus $20m cash this would give a market cap of $56-65m as current fair value. Which isn't far off where it sits.
Dismissing a business because of what it sells is a bit simple. Dusk is a seasonal homewares gift shop. From memory candles are somewhere in the 40% of revenue. What matters is if the company sells it's products better than any of its competitors or has a superior business model. Look at Lovisa for example, you could pitch it as cheap plastic jewellery store... Doesn't sound like a great investment but the economics of the business are great.
Dusk has a gross margin of 65% which is relatively good. The high profits of COVID were due to the high operating leverage of the business combined with the revenue increases that occurred. The fact revenues dropped 8% means that operating leverage can't be taken advantage of at the moment. I would want to see decent revenue growth before even considering buying again.... I would put that down as the main reason I did get burnt. When the financials (revenue + profitability) started going backwards that was time to get out (which would have been at a profit rather than loss for myself) so the opposite would apply here before buying again.
It's candles.... Every single mum runs one of these businesses out of their spare room. Avoid
@Longpar5 I think Dusk has been one of our worst investments ever. I got the future story wrong on this one and it has been a drag on our IRL returns. Even so we averaged over 10% last year IRL so I’m happy with that given how heavily Dusk weighed down on it.
I hung on to Dusk for far too long. I’ve watched the ROE deteriorate each year (I think that’s a mistake) hoping it would turn around, and now it is a very average retailer at best with no signs of growth.
My wife was never a fan of it and I should have listened to her. Lately when I’ve walked past the Toowoomba Dusk store I haven’t seen any customers, just two employees having a chat! Why two? The first half is always dismal.
To be honest I wasn’t that impressed with the trading update either and was surprised the market was. So I used this as an opportunity to get out at a huge loss. When I lose faith in the future of a business I like to part ways as soon as possible and find another business with a better long-term future. In the case of Dusk all the proceeds have gone onto Audinate. I can see a better future there.
I didn’t sell Dusk well either. I rushed in on the open after the trading update and missed the days highs. I let emotion get to me!
Anyway @Longpar5 I hope you do well out of it! It looks like the share price has some momentum up now and the fully franked dividends should be reasonable. Personally I’m pleased to see the back of it!
No longer held.
Burned at Both Ends!
They say you can’t burn a candle at both ends…but they didn’t say anything about its investors! I hope you’re enjoying the ride @Longpar5! a lot can happen in a week and your contrarian patience is paying off. You might see $1.40 yet! I’ll just go back and sulk in the corner! :(
