New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Michael Hill International / Equity Bottom-Up

Michael Hill Intl FY20 Result&nbsp;— A Diamond in the Rough?

OUTPERFORM
Michael Hill (MHJ) reported FY20&nbsp;EBIT&nbsp;ahead of our expectations, displaying execution on cost out measures and supported by wage subsidy payments. Recent trading suggests&nbsp;MHJ&nbsp;is tracking well into FY21, and we have made positive revisions to our earnings forecasts.&nbsp;We lift our target price +NZ$0.09 to NZ$0.49 (+23%), reflecting both higher earnings forecasts and lower cost of capital assumptions.&nbsp;MHJ&nbsp;has shown early signs of positive trading, with scope to beat our forecasts should these continue. However, there is a high degree of uncertainty in near-term outcomes, with the impact of economic fall out from&nbsp;COVID-19 largely unknown. Increases in&nbsp;COVID-19 case numbers and subsequent&nbsp;lockdowns&nbsp;in Victoria and Auckland highlight an ongoing risk for the global retail sector. Trading on a one and two year forward PE ratio of 6x and offering a double digit cash yield in FY22, we view valuation as attractive and more than compensating for uncertainty. We upgrade to OUTPERFORM but note the high risk rating for&nbsp;MHJ.


FY20 characterised by&nbsp;COVID&nbsp;disruption


FY20 was a challenging period for MHJ, with COVID-19 shutting store doors across all markets for up to 13 weeks, resulting in c. A$80m in lost sales. In addition, foreign exchange headwinds weighed on store gross margin, contracting to 60.6% (from 62.0% in FY19). Supporting earnings was A$18m of government wage support, as well as execution on cost out initiatives accelerated during the period. Unsurprisingly, digital sales were a bright spot, surging +55% for the year, accelerating meaningfully in 4Q (+240%). Online sales penetration was 5.0% (FY19 2.8%). MHJ has introduced a wide array of digital initiatives, including virtual consultation, a loyalty programme, Brilliance, and has recently launched a pure online brand, Medley, focussed on the demi-fine jewellery category.


Balance sheet healthy


MHJ&nbsp;has a strong financial position, with a minor net cash position at FY20 year end. Strong cash flows were&nbsp;supported by wage subsidies&nbsp;and a reduction in working capital, driven in part by improved payment terms (expected to be enduring) and&nbsp;rent&nbsp;abatements. After adjusting for rent owed, net debt would increase to ~A$13m.&nbsp;MHJ&nbsp;has an&nbsp;existing debt facility of A$70m, providing the company with sufficient capital to support it&nbsp;through both its seasonal peak and possible periods of further disruption.&nbsp;


Strategy update and outlook


MHJ's strategy update maintains a focus on growth and margin expansion, which is expected to be delivered through improving its omni-channel offering, streamlining the supply chain, and embedding cost disciplines. There had been early positive signs of execution on initiatives ahead of COVID-19, and outlook commentary suggests trading out of lockdowns has resumed positively, with sales and gross margin ahead of the prior comparable period. We have made material upgrades to our earnings assumptions, but remain c. -20% below pre-COVID levels, against a share price which has declined -43%. Upgrade to OUTPERFORM.&nbsp;




Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255




Michael Hill Intl: FY20 Result — A Diamond in the Rough?