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

<h2>Michael Hill&nbsp;Intl</h2>
1H20 Result — Needs a Polish
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255
NEUTRAL &nbsp;
Michael Hill International (MHJ) reported a softer than expected 1H20 result, underpinned by margin contraction. The company has signalled it expects 1H20 represents a gross margin trough, as it looks to advance a number of ​sales initiatives and supply chain efficiencies to expand margins. Heading into the second half, MHJ is cycling a period of stronger sales against a backdrop of weaker margins. Whilst corporate cost-out is encouraging and growth in market share is a longer term positive, we remain cautious over the rate of margin improvement. We see the current risk/reward as balanced and retain our NEUTRAL rating.
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<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">MHJ</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$0.60</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">24.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">25.8</td>
<td style="text-align: left; width: 43.2pt;">26.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">27.6&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">4.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.4</td>
<td style="text-align: left; width: 48pt;">4.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$0.65</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">6.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.8&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">6.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.2&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">7.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.6</td>
<td style="text-align: left; width: 48pt;">6.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">HIgh</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-29</td>
<td style="text-align: left; width: 42.6pt;">6.6</td>
<td style="text-align: left; width: 43.2pt;">0.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.7&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">9.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">382.5m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">4.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.2&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.3&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.3</td>
<td style="text-align: left; width: 42.6pt;">1.3</td>
<td style="text-align: left; width: 48pt;">1.3</td>
<td style="text-align: left; width: 42.6pt;">1.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$229m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">80</td>
<td style="text-align: left; width: 48pt;">80</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">7.1</td>
<td style="text-align: left; width: 42.6pt;">5.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.7</td>
<td style="text-align: left; width: 42.6pt;">8.8</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">379.3k (NZ$253k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">9.8</td>
<td style="text-align: left; width: 42.6pt;">7.3</td>
<td style="text-align: left; width: 48pt;">11.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">11.5</td>
</tr>
</tbody>
</table>
1H20&nbsp;— Sales glimmer, margins dimmer
The challenging retail backdrop persisted through 1H20, with elevated discounting activity combined with cost headwinds weighing on group gross margin. Store gross margin contracted to 59.1%&nbsp;(from 62.5% in 1H19). Providing some margin offset was delivery on&nbsp;corporate cost-out&nbsp;initiatives, with&nbsp;MHJ&nbsp;reporting underlying group&nbsp;EBIT&nbsp;of A$31.6m, up +6.6% as it cycled a weak prior period. Encouragingly, sales momentum continued with group same store sales up +6.3% in 1H20, led by strong growth in New&nbsp;Zealand&nbsp;and Canada, as the brand gained market share across all geographies.&nbsp;&nbsp;
Strategy update: A more refined approach
MHJ has reached a turning point, refining its strategy towards gross profit dollar. During FY19, MHJ moved to target market share gains at the expense of margins, which delivered positive sales momentum. Gross margins are now at recent lows across all three markets, with MHJ expecting an improvement to come from a mix of (1) sales incentive schemes, (2) improved product sales mix, (3) supply chain efficiencies, and (4) an ongoing reduction in overheads.&nbsp;
Outlook and earnings changes
MHJ provided no formal guidance, although identified the challenging retail backdrop in and recent macro-events (such as cornoavirus) as creating additional near-term uncertainty. We view a growing focus on gross margin dollar as a positive and forecast incremental improvements in margins over the medium-term. However, we have made modest cuts to our earnings (FY20E/21E/22E EBIT down ~-4%), which reflect a lower base margin assumption and a slower path to improvement. Although we forecast incremental improvement in margins alongside low single digit same store sales growth, we remain cautious of any detrimental impact to sales, in light of indications of a decline in sales in the wider jewellery category.
MHJ&nbsp;cut its interim dividend -1.0cps (AUD) to 1.5cps, in light of its previously highlighted wage remediation costs. Wage remediation costs are now expected to be towards the top end of the previous announced range (A$10m to A$25m), and as such we have lifted our expectations to A$22m. This cost is expected to be a one off occurring in 2H20.

Michael Hill&nbsp;Intl
1H20 Result — Needs a Polish
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255
NEUTRAL &nbsp;
Michael Hill International (MHJ) reported a softer than expected 1H20 result, underpinned by margin contraction. The company has signalled it expects 1H20 represents a gross margin trough, as it looks to advance a number of ​sales initiatives and supply chain efficiencies to expand margins. Heading into the second half, MHJ is cycling a period of stronger sales against a backdrop of weaker margins. Whilst corporate cost-out is encouraging and growth in market share is a longer term positive, we remain cautious over the rate of margin improvement. We see the current risk/reward as balanced and retain our NEUTRAL rating.
         


NZX Code
MHJ
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$0.60
NPAT* (NZ$m)
24.3&nbsp;
25.8
26.1&nbsp;
27.6&nbsp;
EV/EBITDA
4.5&nbsp;
4.4
4.4&nbsp;
4.3&nbsp;


Target price
NZ$0.65
EPS* (NZc)
6.3&nbsp;
6.8&nbsp;
6.8&nbsp;
7.2&nbsp;
EV/EBIT
7.0&nbsp;
6.6
6.7&nbsp;
6.4&nbsp;


Risk rating
HIgh
EPS growth* (%)
-29
6.6
0.9&nbsp;
5.7&nbsp;
PE
9.5&nbsp;
8.9&nbsp;
8.8&nbsp;
8.3&nbsp;


Issued shares
382.5m
DPS (NZc)
4.3&nbsp;
3.2&nbsp;
5.2&nbsp;
5.3&nbsp;
Price/NTA
1.3
1.3
1.3
1.3&nbsp;


Market cap
NZ$229m
Imputation (%)
100
100
80
80
Cash div yld (%)
7.1
5.3&nbsp;
8.7
8.8


Avg daily turnover
379.3k (NZ$253k)
*Based on normalised profits


Gross div yld (%)
9.8
7.3
11.4&nbsp;
11.5



1H20&nbsp;— Sales glimmer, margins dimmer
The challenging retail backdrop persisted through 1H20, with elevated discounting activity combined with cost headwinds weighing on group gross margin. Store gross margin contracted to 59.1%&nbsp;(from 62.5% in 1H19). Providing some margin offset was delivery on&nbsp;corporate cost-out&nbsp;initiatives, with&nbsp;MHJ&nbsp;reporting underlying group&nbsp;EBIT&nbsp;of A$31.6m, up +6.6% as it cycled a weak prior period. Encouragingly, sales momentum continued with group same store sales up +6.3% in 1H20, led by strong growth in New&nbsp;Zealand&nbsp;and Canada, as the brand gained market share across all geographies.&nbsp;&nbsp;
Strategy update: A more refined approach
MHJ has reached a turning point, refining its strategy towards gross profit dollar. During FY19, MHJ moved to target market share gains at the expense of margins, which delivered positive sales momentum. Gross margins are now at recent lows across all three markets, with MHJ expecting an improvement to come from a mix of (1) sales incentive schemes, (2) improved product sales mix, (3) supply chain efficiencies, and (4) an ongoing reduction in overheads.&nbsp;
Outlook and earnings changes
MHJ provided no formal guidance, although identified the challenging retail backdrop in and recent macro-events (such as cornoavirus) as creating additional near-term uncertainty. We view a growing focus on gross margin dollar as a positive and forecast incremental improvements in margins over the medium-term. However, we have made modest cuts to our earnings (FY20E/21E/22E EBIT down ~-4%), which reflect a lower base margin assumption and a slower path to improvement. Although we forecast incremental improvement in margins alongside low single digit same store sales growth, we remain cautious of any detrimental impact to sales, in light of indications of a decline in sales in the wider jewellery category.
MHJ&nbsp;cut its interim dividend -1.0cps (AUD) to 1.5cps, in light of its previously highlighted wage remediation costs. Wage remediation costs are now expected to be towards the top end of the previous announced range (A$10m to A$25m), and as such we have lifted our expectations to A$22m. This cost is expected to be a one off occurring in 2H20.

Michael Hill Intl: 1H20 결과 — 폴란드어가 필요합니다