02-Sep-2020:  Euroz: Joyce Corporation Ltd (JYC $1.47): Speculative Buy: Full Year Results

Analyst: Seth Lizee, 2nd September 2020, Price Target: $2.30/sh (up from $2.20/sh), Recommendation: Speculative Buy.

Full Year Results

Investment Case

JYC has had a transformational year, operations have been streamlined in parallel to finishing the period with a significantly stronger balance sheet. The business delivered underlying earnings growth during what was a challenging time for the industry, including divesting Lloyds Online Auctions during the second half.

We are now wholly focused on KWB and Bedshed. Subject to no further deterioration of the COVID-19 situation we see potential for further earnings growth, specifically from KWB through additional market share. We believe if JYC can meet our forecast on its current portfolio of companies that the stock can re-rate. On our forecast JYC trades on a forward P/e of 9.1x and 7.5% dividend yield.

We maintain our Speculative Buy recommendation with an Increased $2.30/sh. Price Target.

Key points

• Key Financial Highlights:
  • $186.6m Network sales (Inc. Franchisee partners, +10.1% YoY)
  • $87.6m revenue from continuing operations (+4% YoY)
  • $12.0m EBIT from continuing operations (Inc. NCI, +20.3%)
  • $2.3m loss from discontinued operations
• KWB Group commentary:
  • KWB now operates 21 showrooms including the additional showroom added in Tweed Heads this year, there are further plans for new showrooms in Sydney’s northern suburbs in 2021
  • KWB has further been able to develop operational efficiencies during the pandemic, implementing a new customer engagement structure; this work is continuing with plans to improve internal operating systems into this year
• Bedshed commentary:
  • Bedshed’s showrooms remained open during the pandemic, maintaining engagement with customers and suppliers, allowing the business to gain further market share and grow revenues
  • The company continued to work on improving customer experience through the rollout of its new point of sale and eCommerce solutions
• JYC divested its remaining 46% interest in Lloyds Online Auctions for $3.8m during the second half
• Declared fully franked 2.7c final dividend, payable 16th November 2020
• $10.6m cash as 30 June (+52% YoY from $6.9m in FY’19)
  • Cash has increased $2.2m since year end;
  • Further $3.3m cash once Lloyd’s sale finalised;
• Board succession plan underway with Jeremy Kirkwood to move into Chair role following AGM
  • Mike Gurry will remain on board as non-executive director (subject to being elected)
• JYC CEO Keith Smith has recently announced he will be leaving the business, having made significant contributions to optimising the business model and processes
  • Keith has agreed to stay on with JYC as a new CEO transitions into the role

Key Commentary:

• KWB
  • We have forecasted flat margins, however note there is further potential for additional expansion.
  • We anticipate two new showrooms coming online in FY’21, this including the recently opened Tweed Heads (opened July 1st)
  • We have maintained flat revenue/showroom, however we similarly highlight potential for further growth in time
• Bedshed
  • We have maintained flat margins and average revenue per store.
  • We anticipate no new stores being added in FY’21
    • We continue to see potential for greater market share growth, however per JYCs commentary COVID-19 seems to have delayed any new additions this year
    • JYC stating that its team was engaging with +100 live enquires in the first half, however these were delayed through the onset of the pandemic. JYC further state there continues to be a good level of interest
• We have slightly reduced our corporate overhead cost forecasts taking into account certain one-off costs which were included this year.

Balance Sheet

JYC has significantly bolstered its balance sheet over the past year, going from $3.3m Net debt (ex. Leases) to $4.9m Net Cash (ex. Leases). This the result of both operational cashflows and divesting of Lloyds.

As of 30 June 2020, there was $10.6m in cash, JYC stating this has increased by a further $2.2m since reporting.

In addition to this there is a further $3.3m from Lloyds to be received, this payable to JYC by 24th September 2020.

All this shows how large JYC war chest has grown.

We highlight the number of different outcomes which may arise from this cash including:

• Special dividend payment/increasing dividend
• Opportunistic acquisitions

Both of these have the potential to create/unlock value for JYC shareholders, the latter more so, should JYCs management team identify a solid opportunity.

We have not assumed/included any of this in our valuation, rather highlight it as further upside should it materialise in any form.

Valuation and PT

We maintain our Speculative Buy recommendation with an Increased $2.30/sh. Price Target.

Our price target uses a combination of capitalisation of forward looking NPAT and longer term DCF to calculate a 12 month PT of $2.30/sh.

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