Mixed Business

Super Retail Group announced a $203m equity raising, and a stronger-than-expected sales and gross margin trading update.

 

The proceeds from the $203m pro-rata entitlement offer, priced at $7.19 per share, will be used to invest in omni-retail customer experience and supply chain, business model simplification, footprint optimisation and working capital, to take advantage of accelerated sales and organic market share opportunities.

 

For the nine weeks to 23 May, like-for-like sales were led by Supercheap Auto (SCA), which rose 3.7%, with declines in Rebel (down 2.3%), BCF (down 0.7%) and Macpac (down 38.8% due to the New Zealand closure). For May year-to-date (YTD), group LFL sales rose 1.2%, with total sales increasing 1.9%.

 

Gross margins fell in April and May due to product being higher-value but lower-margin, and channel (online) mix, with cost mitigation offsetting this partially. Pre-tax abnormal items amounting to $40m will be recorded in the second half, while cash is being tightly managed (capital expenditure was only $61m May YTD), with inventory falling $65m at the end of May versus the same period last year.

 

We have reduced our reported EPS forecast by 21% due to 2H20 one-off items. Excluding one-off items, our EPS estimates change by +1.3% for FY20, -5.7% for FY21 and -6.7% for FY22 due to the strong trading update but with dilution from the equity raising (pre AASB 16* accounting).

 

Super Retail has not been a winner during the COVID-19 crisis in the same way as Harvey Norman (HVN, Hold), JB Hi-Fi (JBH, Accumulate) and some businesses within Wesfarmers (WES, Lighten), with the Australian bushfires and the pandemic having weighed on revenue and earnings. The company retains an attractive business mix, however, and is well positioned for a post-COVID-19 recovery. We also note valuation support. We maintain our Accumulate recommendation and have raised our target price to $9.50 from $9.00.

 

* The AASB 16 accounting standard removes the distinction between operating and finance leases on a company’s balance sheet.

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