Furniture Retailer Adairs in action- Stock in Green Zone

Consumer Discretionary Segment

The Consumer Discretionary sector includes businesses that sell non-essential goods and services. Non-Essential products include, tobacco, cars, home decors etc- the type of goods and services that are not strictly necessary. The demand for these types of goods is more elastic in comparison to staple goods. The elastic demand represents change in accordance to the consumer income level- as the income level goes up the need for such goods increase and decrease in the income can subsequently lead to the decrease in the demand.

The S&P/ASX 200 Consumer Discretionary (Sector) traded higher on 5 December 2019, up by 1.52 per cent or 40.8 points, and the Australian Benchmark S&P/ASX 200 quoted 6683.0, up by 76.5 points or 1.14 per cent.

Moving over to the furniture industry, operators in this space have been exposed to a volatile market over the last five years. The trading condition has been intensified due to the declined demand in the residential property segment in the past three years. As a result, the industry segment is expected to grow with an annualised return of merely 1.4 per cent in the next five years.

Let’s have a look at Adairs Limited, from the Consumer Discretionary sector and its recent updates.

ADH Share price Soars

On 5 December 2019, ADH traded higher and settled at $2.280 on Australian Stock Exchange, a rise of 5.5% from its previous closing price, where the stock had soared by over 21%. The increase was due to the Company’s recent announcement of the acquisition of Mocka Limited, wherein Mocha limited sold 100 per cent of their shares to Adairs Limited for an initial enterprise value of c.NZ$80 million.

Adairs Limited (ASX: ADH)

Adairs Limited is a leading specialty retailer of home furnishing across ANZ. The company has a national footprint of stores across several store format and an online format. The company’s product includes bedlinen, bedding, towels, homewares, soft furnishings, children's furnishings as well as occasional and bedroom furniture.

ADH Acquires Mocka Limited

The company has announced that it has entered into an agreement to acquire Mocka Limited for an initial enterprise value of c.NZ$80 million (A$75.5 million). Mocka Limited is an online retailer of home decor products operating in New Zealand and Australia. It has consistent strong sales growth and margins with high levels of profitability and cash generation.

Mocha limited will sell its 100 per cent share to ADH and the binding agreement is subject to the satisfaction of customary conditions and is projected to complete in mid-December.

Key Financial highlights of Mocka, related to the acquisition-

• Implied acquisition EV/EBIT multiple of 8.7x FY20 EBIT (without synergies) based on the enterprise value of NZ$80 million
• Increase in Adair’s Online revenue by c.29 per cent of the total revenue (pro-forma FY20 >A$100 million)
• The company deliver pro forma FY20 EPS accretion of c.10 per cent and Pro forma Net Debt / FY20 EBITDA for the group of ~1x.

Mark Ronan, MD & CEO of the company commented:

The acquisition does not have any impact on ADH’s existing dividend policy or impact the scope or timing of the supply chain initiatives currently under review.

Acquisition Funding

The acquisition agreement between the company and Mocka will be funded through a combination of Adairs’ group term debt facilities and an issue of c.3.2 million ordinary ADH shares to the vendors. Around 65 per cent of the consideration will be paid at settlement in mid-December 2019, of which NZ$6 million (A$5.7 million) will be paid in the form of company’s shares and the balance (NZ$46 million /A$43 million) in cash. These new shares will equate to c.1.9 per cent of Adairs’ expanded issued capital and will be escrowed until the release of Adairs’ FY21 results.

The rest 35 per cent of the consideration will be paid in stages over the next 2-3 years subject to Mocka’s earnings, based on a notional valuation multiple of 7.5-8.5x Mocka standalone EBIT in the relevant future periods. The deferred consideration is subject to a minimum amount of NZ$20.0 million.

Guidance

The Board remains comfortable that the FY20, guidance previously provided for Adairs (ex Mocka) remains appropriate. On the basis of 30-week contribution from Mocka in FY20 the Board has issued a revised guidance. FY20 guidance numbers based on a pro forma full-year contribution from Mocka are for illustration purposes only:

The company’s financial performance for FY 2019 can be viewed here

Results of Annual General Meeting

The company recently declared the Annual General Meeting results held on 25 October 2019, below are the resolutions which were passed during the AGM:

• Resolution 2A - Re-election of Trent Peterson as a Director
• Resolution 2B - Re-election of Kate Spargo as a Director
• Resolution 3A - Election of Kiera Grant as a Director
• Resolution 4B - Election of Simon West as a Director
• Resolution 4 - Remuneration Report
• Resolution 5 – Approval of Long-Term Incentive Grant of Options to Mark Ronan
• Resolution 6 - Approval of Long-Term Incentive Grant of Options to Michael Cherubino

Stock Performance

The company has approximately 165.87 million outstanding shares and a market cap of $358.2 million. The 52-week low and high value of the stock is $1.250 and $2.200, respectively. The stock has generated returns of 4.85 per cent in the last six months and 19.6 per cent on a year to date basis.

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