General notes:

• Notes generally made on the continuing operations of the business.
• Undergoing ERP program. Management advised no issues at the moment.

Positives:

• Still net cash with no debt and a decent looking balance sheet.
• While revenues have been down, not down significantly like other retailers except for international business.
• Management has executed on the exit of Australian appliances and sale of Omega brand and returning cash ($17.8m) back to shareholders through a capital return.
• Dividend of 2c.
• Still producing an ROE of 15%+ based on my estimates for profitability of $8-10m for FY.

Negatives:

• Continuing ops PCP comparison:
• Revenue $64.1m down 2.7%
• EBITDA $10.4m down 13.3%
• NPAT $6.1m down 7.6%
• International revenue down 18.2%.
• Outlook unchanged at EBITDA of $15-17m

Has the thesis been broken?

• Yes, been contemplating why I hold this for a while. Thesis was a P/E play and based on profitability being maintained. In terms of P/E I don't see the conditions for further expansion in the multiple. Shriro is not far from what I would term its fair value at around an EV of $80m based on expected profitability and a multiple of 8-10x. The business fundamentals are all down on an continuing ops basis and no real indication in sight that they will improve over the shorter term. Therefore, with no real significant gains to be made I have sold out of Shriro.

General notes:

• Revenue down as expected to $152.4m mainly as a result of the exit of the Australia appliances division.
• Very strong cash flows relating to the sale of divisions. This will be a one of release of capital.
• EBITDA = $17.6m as reported recently.
• NPAT = $8m in line with my expectations.
• NPAT for continuing operations = $9.8m or 10.2c per share
• Dedicated executive to find acquisition opportunities with a focus on strong cash flow returns.
• New ERP software will be implemented over FY24/25 at a cost of $1.6m in FY24.
• Other financial metrics:
• NTA = 67c per share
• EBIT = $14.2m (continuing ops)
• EV = $54m
• EV/EBIT = 3.8x (continuing ops)
• ROE after return of capital and dividend considered = 15.9%.

Positives:

• Cash balance of $32.8m
• Dividend of 6.5c fully franked. 10c fully franked dividend for FY.
• Capital return of 18.5c (subject to approval).
• Gross margin improvement to 41.8%.
• New Casio calculator for schools exceeding expectations.
• The exit of appliances and Omega brand has resulted in restructured overheads and the ability to sublet of some of its facilities reducing costs by $1.1m annually from 2HFY24.

Negatives:

• Post covid BBQ sales not as strong resulting in excess stock with retailers. International BBQ segment was basically flat. Some discounting is required to move excess stock.
• Keep talking about acquisitions but never seem to actually make one. Is this a good or bad thing in terms of capital allocation?

Has the thesis been broken?

• No, overall happy with the result. Still continuing to provide a high yield. Bought originally because management maintained a high ROE which they are continuing to execute. It isn't the most interesting investment but its maintaining a 10% fully franked yield so still to hold as opposed to sell. Still just watching and holding how this goes. Not one I see myself holding forever. Will sell out if valuation is meet. On an EV/EBIT ratio this is still very cheap....

Valuation:

Target PE = 10, EPS expectation = 10c, Capital return = 18.5c.

Valuation pre-capital return = $1.185

Valuation post-capital return = $1

What are you expecting and what do you need to see over the next reporting season or generally into the future?

• Company is guiding EBITDA of $15-17m therefore I expect NPAT in the range of $9-10m.
• Core brands such as Casio calculators and G-Shock watches are expected to perform well even with uncertain consumer outlook.

Expectations:

• EBITDA of $17.6m as per recent update.
• NPAT = $8-9m based on above guidance and previous ITDA numbers.
• Normal dividend of between 5-8c and a special dividend. Would like to see the special dividend total amount in the range of $7-10m to returned to shareholders, this is the cash from the sale of kitchen appliances business. This could be in the form of a return of capital?
• International segment continuing to grow well of low base.
• Inventory levels have been corrected.
• Expecting a very strong cash flow results as a result of reduction in working capital.
• Revenues to be approximately the same or slightly down on FY22 after taking out Blanco exit.
• Gross margin maintained in the 43% range.

Questions to be answered:

• Some news on plans for acquisition or new brands for distribution. Previous statement that one brand will be added in FY24.
• What is the outlook for the next FY?
• Have they felt the same impact as other retailers?
• Will the high ROE be maintained?
• What's the plan for growth (mainly on an EPS basis)?
• Maintaining position because market cap price was close to NTA. Has this changed at all? Do you still have that safety?
• Are there continued signs that you could be caught in a value trap here?

Shiriro announced EBITDA profit of $17.6m down from a previously guided $18.5M. While a miss, this is only a small difference and potentially explained by the kitchen appliances business exit.

The cash on hand as of 30th June was $32.8m which is up from $6.4m at half year end. Around $12m of cash was expected from Omega exit. Leaving a $14.4m in cash change from changes in receivables vs payables, inventory reduction (excluding Omega products) and operating cash flows. Will need to see the balance sheet to see where to attribute the increase to. Hopefully, inventory reduction and operating cash flows...

Given the EBITDA guidance I expect NPAT of $8-9m. Market liked the announcement with shares up around 20% since its release. 

The board released an announcement on Monday strongly implying at a return of surplus cash to shareholders. The wording of the announcement seems to imply this will be through a dividend rather than capital return. Given the $12 million of cash that the Omega sale was to produce through collection of debtors and inventory, I would expect a dividend/cash return of around $10 million above the normal dividend payout.

One of the reasons I bought Shriro was for the history of prudent capital allocation. Shriro has kept ROE above 15% on average over that last 3+ years. Shares are up 7% on the news today. Still on watch due to the potential performance downgrade due to the macro-economic environment.

General notes:

• Financials (vs pcp):
• Revenue = $84.4m (-11.7%). Basically flat if you take out Blanco exit.
• Gross margin = 43.1% (up from 42.5%)
• Operating expenses = $24.0m (-8.5%).
• EBITDA = $12.4m (-7.5% on like for like)
• NPAT = $6.3m
• Dividend = 3.5c (fully franked). Annualised yield of 9% on fully franked basis or 12.8% on gross basis using share price of 78c.
• NTA per share = 69.5c (89% of a 78c share price)
• Gross margin improved due Blanco exit, currency tailwinds, increased product prices and lower shipping costs.

Positives:

• International sales continue to grow rapidly off a low base with an 82% increase on pcp. New pizza oven exceeding expectations.
• Reduced operating expenses. Helped by Blanco exit, however, still a good result considering cost inflations and freight cost. Management has reduced consultancy costs, reducing staff and consolidating logistics warehouse.
• $500k profit boost for the FY through being able to move returned stock.
• Improved gross profit margin.

Negatives:

• Working capital has increased due to supply chain constraints. Resulting in a negative operating cash flow.
• Comments in releases point to a reduced demand for Shriro's goods.

Has the thesis been broken?

• No, still on watch, company has done well to reduce costs in the current environment. Was looking to sell SHM unless holding can be justified which I think it can due to NTA at 89% of share price and the high yields which are better than selling and sitting in cash. Guidance is unchanged and some positive signs in the international business. Original thesis was based on a company that is well run in terms of the financial numbers and there aren't any red flags to sell from this reporting given they were able to reduce costs in the current environment and no deterioration from expectations.

Valuation:

Unchanged at 96c.

What are you expecting and what do you need to see over the next reporting season or generally into the future?

• Guidance for FY:
• EBITDA = $18.5m (-25%) - unchanged
• My NPAT estimate using DA of $5-6m = approx $9m
• International expected to continue to grow.
• Correction of elevated inventory levels to release cash onto the balance sheet.
• Looking for an acquisition and attracting new brands for distribution. "At least one new brand will be added in FY24".
• Expecting strong operating cash flow result as the working capital reduces.
• Any deterioration in profitability from expectations should be a clear sell.

Overall Comment:

An expected result, however, the outlook is weak. Need to closely monitor progress. Yield and NTA backing providing some confidence on any further downside risk. 

General Notes

• Financials:
• Revenue of $191.8m (down 7.3%). Mainly a result of lockdowns, 2H revenue up 1.7%.
• NPAT of $13.5m (down 33.5%). EPS of 14c.
• EBITDA of $24.6m (down 27.9%).
• Operating cash flow of $12.2m, lower cash flow a result of $6.7m increase in inventories and $2.2m increase in receivables.
• Increase cost to $52.6m (up 5.6%).
• Final dividend of 4c per share fully franked.
• Tangible asset backing of 64.6c per share.
• Cash position of $12.9m
• FY23 outlook notes:
• Shriro is evaluating a potential acquisition.
• Exit of Blanco, note a high profit brand but helped cover overheads.
• BBQ in Europe expected to struggle, US expecting growth.
• Looking to cut costs where possible.
• Inventories have increased from $34.5m to $41.2m

Positives

• International Everdure by Heston Blumenthal sales increased by 27.5%. This is off a low base for comparison. Everdure in Australia revenue was up 18.2%.
• Tangible asset backing not to far off share price, hopefully creating a floor price for downside risk.
• Total dividend for the FY of 10c fully franked (12% yield), grossed up this is 14.3c (17.2% gross yield). Note yields based on the current 83c share price.
• Results were on the higher side of guidance.

Negatives

• Very weak outlook. EBITDA expected to be down "by as much as 25%". 
• Profitability down significantly from previous year, this was expected, the previous year was always going to be a standout result.

Has the thesis been broken?

• On serious watch due to profitability expectations being downgraded. Is this a one off due to the current market conditions or a longer-term expectation? Only staying in due to the low downside risk due to NTA backing and high yield. 

Valuation

• Based on an EBITDA reduction of 25%, I work out the expected NPAT to be $9.2m. Keeping with a PE target of 10, based on strong tangible asset backing as a protection to the downside. Therefore, target MC of $92m or 96c per share. 
• Based on a 70% payout ratio I expect a total dividend payment of approximately $6.5m. This would represent an 8% yield fully franked at current share price. 

What are you expecting and what do you need to see over the next reporting season or generally into the future?

• Profitability can not go below the $9m figure above.
• Outlook gets any worse = instant sell.
• Dividends continue to be paid at expected rates.

Shriro announced on Monday that Kim Slater had resigned effective immediately. As described in my previous straw, Mr Slater was looking to stay on until a new director to replace him was found. John Murphy was appointed as a director effective immediately, Mr Murphy was nominated by Portfolio Services (part of Ariadne Australia (ASX:ARA)). As a result of these developments the extraordinary general meeting requested by Portfolio Services is no longer required, the outcomes from the meeting they were seeking have come to fruition.

The four person board is now made up of:

• Abigail Cheadle - Independent chairwoman
• Tim Hargreaves - CEO/MD
• Brian Bunker - Non-executive director
• John Murphy - Non-executive director

Moving forward, I would like to say that this is the end of the board issues. Overall, as stated previously I have no issue with this board composition as I can see the incentive for the primary shareholders to create value for all shareholders and the potential that Portfolio Services is using the board position as an activist for change within (just my person guesses here).

I wonder if Mr Slater could see the writing on the wall... If anyone could answer a question for me? Are directors able to see the votes/proxies as they are made prior to AGM/EGMs?

Shiro released a market update with the following guidance:

• Revenue between $191-196M
• EBITDA between $20-26M

The revenue figure was in line with previous two years results while the EBITDA figure is down from the 12 months to Dec 21 figure of $26.8M and 12 months to Dec 20 figure of $32.3M. Management's reason for the decline in EBITDA was the increase in freight and fuel cost and additional expenses of a new ERP system and enhancing cyber security.

The board shenanigans should be resolved at an extraordinary general meeting (11 June). The major shareholders are looking to remove Kim Slater, he has already said he will retire but is not looking to be pushed before a new director is found. There is nothing positive about the recent board issues (two previous departures before this) besides the fact the large shareholders are taking over control, personally I have no issue with that. The appointment of John Murphy from Portfolio services (5% holding in SHM) is interesting from the outside it looks like they may be running an activist strategy with their SHM holding.

Will be downgrading valuation based on mid-range EBITDA figure. DA is normally around $6m, I is negligible and normal tax rate of 30%. This gives an NPAT estimate of approximately $12M. Maintaining a PE target of 10. This gives a target MC of $120M or $1.25 per share.

Shares are on watch for any further board issues or cost increases. Still holding due to the great yield expected that provides a very decent return on its own (10+% grossed up).

Overall Comment:

Overall, result was as expected or slightly better given the hit from east coast lockdowns. Current dividend yield is very high and NTA backing up the share price gives little downside potential to holders. The gross dividend yield by itself is giving me my expected pre-tax return of 15%+ at current prices. Thesis is based on Shriro management being good capital allocators, this continues to be the case with high ROE and high dividend yield. Loss of Bianco over the next year will hopefully be offset by the opportunities from the international BBQ market through the "Everdure by Heston Blumenthal" brand.

General Notes

• Key financials:
• Revenue = $95.6m, down 14.8%
• International revenue was up 29.4%.
• Gross margin = 42.7%, from 40.2%.
• EBITDA = $14.5m, down from $21.8
• NPAT = $8.2m, down 39.3% from $13.5m. PCP had $3.7m of before tax subsidies and $2.3m of head office lease exit benefits. Current half benefited from $1.1m of NSW JobSaver. Accounting for this PBT was only $2m less comparatively.
• Dividend of 6c, fully franked. This gives a previous year dividend of 12c fully franked (17.1c grossed up). Based on $1.05 share price this is a yield of 11.4% or gross yield of 16.3%.
• EPS = 8.6c
• Net assets = $69.5m. Cash = $7.2m.
• NTA per share = 67c
• Operating cash flow was negative due to a large increase in inventories to help with current global supply chain issues currently occurring.
• Received $1.1m from NSW JobSaver.
• Cash at bank 31/1/22 was $10.2m.
• Sales for January 2022 up 3.8% PCP.
• Investing in international BBQ business to drive awareness of Everdure by Heston Blumenthal. Australian revenue for Everdure was up 26.2%. US sales up 115% (low base).
• Financial year has been changed from end of calendar year to standard 30 June FY. This half is the first 1H starting 1 July.

Positives

• Margins increased thanks to reductions in discounting, price increases and larger e-commerce sales through the group's digital marketing strategy. Margins were impacted by high shipping costs so potential for further expansion has shipping costs stabilise.
• Company maintaining high ROE of 23.6% (annualised NPAT of 1H). NPAT likely to be lower accounting for seasonality, but still high no matter the figure used.
• International segment continues to grow strongly.

Negatives

• Overall revenue was down. Heavily impacted by COVID lockdowns on the east coast. Profits were saved by increased margins.
• The cyber attack actually stopped trade for 3 weeks. I don't think the full impact had been clearly disclosed previously. Net this will cost the business around $100k after insurance payments.

Has the thesis been broken?

• No, move to a full position now that the uncertainty of the lockdowns on results is no longer an issue. This 1H NPAT is in line with the expectation of an ongoing yearly profit of $15m. Management is continuing to provide a high ROE and the dividend yield is very high. No clear signs this would drop substantially for any reason. The yield is high because SHM is undervalued in my view.
• Company just needs to maintain results in line with what it is currently doing for my thesis to play out. I like this as an investor as it is low risk, the hurdle bar for superior investment results is exceptionally low.

Valuation

•  Simplifying valuation to PE ratio = 10 and ongoing NPAT of $15m, this gives valuation of $150m + cash of $10mil. Resulting in a per share valuation of $1.65. I am lowering the PE ratio target to accept the perceived low-quality nature of the business.

What are you expecting and what do you need to see over the next reporting season or generally into the future?

• Revenue drop-off of 10% over the next year is expected due to the loss of Blanco in May. However, non-Blanco revenue needs to be stable or increasing.
• What comes out of the appointment of a financial advisor to find growth opportunities? (Pg 8 of presentation).
• Profits at year end may be down under the $15m target due to the 1H lockdowns and the seasonality of earnings. However, if this target is reached then it is a positive sign for the next year (after adjustments for the loss of Bianco brand).
• Margins need to be maintained at current levels for profitability.

General Notes

• International BBQ sales will be a growth category for Shriro. Selling through Amazon and bricks and mortar. Sold in 33 countries.
• "Company is looking to use cash for strategic initiatives" "Seeking a new high margin, non-competitive products for distribution in existing markets and making EBITDA accretive acquisitions which enhance value." These statements are consistent with my thesis that Shriro management is very focused on ROIC.
• Company notes the sales are dependant on whether international borders open up.
• No single customer represents greater than 10% of the group's revenue.
• Company is changing financial year. I have called this result 1HCY21 for reference.

Positives

• Financial results for prior 6 months:
  • Revenue - $94.3m (+20%)
    • International revenue +135.9% PCP off a low base
    • Australiasian market revenue + 13.9% PCP
  • Gross margin - 41% (+2.2%)
  • NPAT  - $6.8m (+44.75)
  • Operating cash flow - $7.3m
  • Net assets - $66.2m
  • Cash - $17.3m
  • Dividend of 6c per share (fully franked) per half
• Financial results are in line with my expectations. International revenue is growing nicely and a good opportunity for future profit growth.

Negatives

• NSW and VIC lockdowns are likely to have an impact on sales in 2HCY21. Sales are normally skewed to this half so will likely need these economies to be open up before Christmas buying season.
• Recent loss of Blanco brand from May 22.

Has the thesis been broken?

• No, results in line with expectations adn thesis. This is a P/E play/trade, I still see this as cheap especially for a company that has a history of stable dividends and ROE.
• Market has liked the result and created some share price momentum.
• Limited downside with book value at around 70c per share.
• Buy next portion as per buying plan. However, adjusting to only a 2/3rd position for the moment due to lockdowns that present a risk to increasing revenues/profits.

Valuation

• I still think this company is worth P/E = 12 + cash. NPAT expectation ongoing is still $15m.
  • MC = (15 x 12) + 17 = 197
  • Target price =  $2.07
• Justification for target P/E of 12:
  • Growth in revenues experienced over the past year.
  • International sales expansion only just getting started.
  • Very consistent and strong ROE results by management. Company allocates its capital effectively and is looking for new opportunities to do so.
  • 10c fully franked dividend gives a current yield of 8.5% (share price $1.185), which is high.

What am I expecting and what do I need to see over the next reporting season or generally into the future?

• Expected results at year end:
  • Revenue = Greater than CY20. International revenues must have continued to increase at a high rate (+30%). Result dependant on NSW/VIC lockdowns.
  • NPAT = $15m+
• There will be a strategic acquisition or return of cash.
• What I don't want to see happen:
  • Another cyber security incident
  • Another major distribution right lost.

What does Shriro do:

Shriro is a kitchen appliance and consumer products marketing and distribution business. Brands include: Omega, Robinhood, Everdue, Casio, Blanco, Pioneer and Neil Perry Kitchen appliances. The types of products include: appliances, music equipment, BBQ, rangehoods, sinks, taps, calculators, heaters, watches and POS equipment. Most of their revenues come from Australia, with a small business in NZ. They are currently expanding globally in some product lines.

Main Thesis:

• P/E play / cheap stock with limited downside that is printing cash and has large cash reserves. Management has continuously provided shareholders with a very good ROE and ROIC.
• Shriro has reached a point of operating leverage and started to increase revenues when previously they were falling. Management has been working hard to cut costs to increase profitability. Debt from IPO has been paid off with the company in a strong net cash position.
• Shriro only has to maintain current profitability of approximately $15 mil (this figure removes Jobkeeper) and shareholders over time should expect decent returns in the form of dividends or capital appreciations.
• At current value I believe you are getting a free option on international sales business expanding.

General Notes:

• An investment in Shriro is not going to be a long term compounder more a 1-5 year hold while market realises the value(which it may not). While holding I would expect a dividend yield of at least 7% (fully franked) with low downside risk. NTA is 57c per share. The capital allocation of management appears to be very good so I don't see why this would change without management changes. This factor reduces the risk of holding.
• This is not a "high quality business" in most peoples eyes but a fair business at a wonderful price.
• Ratios:
  • EV/EBIT = 86/26.7 = 3.2
  • Tobias Carlisle's Acquires multiple = 86/19.178 = 4.5
  • P/E = 103.6/(19.1*0.7) = 7.7 (minus one offs)
  • ROE = 32.5 % for TTM and 22.5% for 5 year average.
  • NTA/Share =  57c per share = 0.54% of share price
  • P/B = 103.6/61.2 = 1.69

Positives:

• Diverse range of retail products sold. May have been boosted by COVID stay at home theme. Appliances are in a good position given the uplift in residential building.
• Management's capital allocation appears to be very good. Very good ROE and ROIC over multiple years. Recent announcements highlight a potential capital return to shareholders if the money cannot be invested well.
• Chart shows general momentum behind the share price.
• Management has reduced costs which have lead to improved profitability.
• International business only made $5.6 mil of revenue in CY20. Total revenue is $191.3 mil so a potential expansion area for the company. However, they only sell heaters, fans and BBQs through this channel.
• Very strong and clean balance sheet with $17.6 mil net cash @ CY20 end.
• Very large margin of safety. 40% drop and the company is at book value. Using EV/E (to remove net cash) purchasing on an earnings yield of 15% (including removal of one-offs). In my opinion all the company needs to do is maintain current profitability of around $15 mil a year and shareholders will receive above market returns through a high dividend yield or capital gains if share price raises.
• Producing strong operating cash flows of $18.5 mil (without Jobkeeper).
• Small board - appears appropriate for a company of this size.
• Management appear to have been with the business for a long time and promoted from within.

Negatives:

• Recent cyber security incident. May require investment and threaten operations.
• There doesn't appear to be any coverage of the stock by analysis a potential reason for the cheap valuation.
• No management holding in the company. Very surprising given their ROE results.
• Nothing exciting about this business. There is no clear moat. This investment is purely about the numbers.
• Does not own all of the brands for which it distributes.
• Experienced chairman is leaving the business.

What to watch for/risks:

• Further cyber security issues.
• Loss of brand distribution rights.
• Current profitability is not maintained.
• Revenue decreases after COVID tailwinds subside.

Catalyst for purchase:

• Management has completed the cost reduction program and revenues are increasing creating strong profitability.
• Half year results showing this company is undervalued.
• Share price momentum.

When to sell:

• Profitability is not maintained at around $15mil or more.
• Any of the risks above are realised.
• At full valuation.

Disclosure: Based on research I am strongly considering taking a small position in SHM.

Thanks Noddy74 for your straws on SHM which got me interested in researhcing SHM.