How long have you held the stock?
We have held the stock in the Pengana Australian Equities Income Fund since inception in August 2017.
What do you like about it?
Super Retail Group is a high-quality speciality retailer with dominant positions in key ‘enthusiast’ categories of Auto and Sports, and a smaller business in Camping and Outdoor Leisure.
Management has successfully leveraged their scale by investing in their core supply chain and logistics infrastructure in recent years, which has increased their competitive advantage, improved both efficiency and cost, and continues to release a substantial amount of working capital, improving cash flows.
Supercheap Auto (c50% of earnings) is a mature, well run business with over 300 stores nationally and a strong and loyal customer base. The business has consistently generated like for like growth between 3-5% over the past 10 years (averaging >4%), whilst at the same time expanding its store footprint and improving EBIT margins from 7% to >11.5% over the same period.
Rebel Sport (c40% of earnings) is Australia’s leading sports retailer with almost 100 stores nationally and is a key route to market for all of the major global sporting brands. Since acquiring Rebel Sport around five years ago, Super Retail Group management has accelerated top line growth whilst maintaining attractive margins.
Management has responded well to the changing retail environment by making substantial improvements to their omni channel capabilities and continuing to invest in maintaining a superior retail experience. Super Retail Group offers competitive and efficient delivery options across each of their businesses, as well as click and collect, which has proven a popular option across many retail categories.
Whilst the initial launch of Amazon has proven to be underwhelming, particularly in the sports category (Auto is less impacted by Amazon), we do expect the threat to increase once the Amazon Prime offer is launched in Australia. That said, international experience suggests that the strongest retailers in each space have continued to prosper in a post Amazon environment, whereas weaker players have fared less well.
Ultimately, we think that the sell-off in the shares over the past 12 months has been far greater than the likely impact Amazon will have on Super Retail Group cash flows – hence a favourable risk/reward profile at this point in time.
Finally, we are being paid nicely to hold the shares of a company that is still growing – with a 5.5% fully franked dividend yield anticipated for FY18.
How is it better than its competitors?
Super Retail Group has superior supply chain and logistics capabilities than the majority, if not all of its competitors giving it a lower cost advantage. Super Retail Group’s scale in Auto and Sport give it considerable fire power in terms of marketing and promotion, omni channel capabilities, and at the margin better negotiating power with landlords.
Super Retail Group’s dominant number one position in both Auto and Sports, means it is a key distribution channel for suppliers, and enables it to build out highly profitable private label ranges as well. Rebel Sport, for example, is not just significant from an Australian perspective, but also globally – we understand it is a top 10 customer globally for Nike.
Super Retail Group has a strong balance sheet with healthy cash flows, which means it is better placed to ‘weather a storm’ than many of its smaller competitors.
What do you like about its management?
Management has a proven track record of managing the business with a long-term perspective, and have responded well to difficulties in the past. Whilst the market has only recently focused on the threat of Amazon, Super Retail Group has been preparing for a step up in competition for a number of years, and in many respects, has led the way in improving their “match fitness” for an Amazon entry.
What is your target price?
We don’t have a target price per se, rather we evaluate what the current share price is offering us from a valuation perspective. Super Retail Group is currently trading on a free cash yield of >10% (in other words, a cash PE of <10), and offering a prospective dividend yield of 5.5%.
At what point would you sell it?
We have our valuation disciplines that would trigger a disposal, however other factors that would change our view include:
- Greater support from global suppliers for Amazon than is currently the case, which could weaken Super Retail Group’s position domestically.
- Evidence of a shift in preference amongst Australian consumers for branded athletic sportswear / products.
- A further deterioration in the consumer environment.
- A significant change or deviation from management’s current strategy.
How much has it added to your overall portfolio over the last 12 months?
Super Retail Group has had a total return of +10% since August 1, which is the inception date of the Fund.
Where do you see value?
It is a quality domestic retailer with dominant market positions, a strong balance sheet, growing cash flows and well prepared to compete and prosper in a post Amazon environment that has been oversold on what we consider to be exaggerated concerns regarding Amazon’s launch in Australia.
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