Hot Stock: Michael Hill International

fatprophet.com

Tuesday 5th July 2016

Moving across the ditch

What’s new?

Michael Hill International recently announced its intention to list on the ASX. While Michael Hill International originally started in New Zealand the company now generates approximately 60 percent of its earnings from Australia. The remaining 40 percent is comprised of 26 percent from across the Tasman, and 14 percent from Canada. USA operations remain in test mode, and this segment chalked up a small loss on revenues of A$10 million for the six months to December 31.

The new listing will take place on July 7 and the move is expected to provide the company with direct access to a wider group of investors. It is also worth noting that NZ shareholders will be able to elect to continue to receive dividends in NZD.

Michael Hill International also recently announced that after two years of a trialling phase the Emma & Roe brand will move into a growth phase in July 2016, after experiencing strong revenue growth of 35% for the 11 months to May.

Michael Hill currently has 15 Emma and Roe stores that are also supported by an eCommerce capability, with 12 new stores planned for NSW and Queensland in 2016 -17. This business segment is expected to remain loss-making during this period as it gears up for growth, with increased investment in business infrastructure and sourcing appropriate talent to meet the company’s growth ambitions expected to outweigh growth in revenue.

Emma and Roe sales for the 9 months to 31 March 2016 were up 87 percent to A$6.78 million compared to the same period in 2015, contributing to 1.6 percent of sales for the group as a whole. We expect this percentage to grow in line with the new store roll-out, with average revenue per store forecast to be approximately $1 million for 2016 – 17.

Outlook

We believe that Emma & Roe complements the Michael Hill brand by offering a range of interchangeable jewellery that allows women to create and design their own look. It typically targets a younger and more cost conscious consumer, thereby broadening the company’s market capture without cheapening consumer’s perceptions of the Michael Hill brand.

More importantly, the capital requirements are approximately half that of Michael Hill stores and the stock turns over nearly twice as fast. While Michael Hill expects to add approximately 12 stores in the coming year, this could grow to up to 20 stores per year depending on the availability of quality sites and the ability to negotiate acceptable commercial terms. Longer term the Group sees potential for 300 stores in existing markets of Australia, New Zealand and Canada.

Price

Michael Hill is currently trading on a forward PE of 13.3 times in 2016, with this forecast to drop to 11.2 in 2017. This, in our view, does not seem overly demanding given the robust global growth being experienced, while the dividend yield of 5.4 percent this year and 6.3 percent next year also adds to the overall investment case. The technical set up for Michael Hill International is also favourable, with the focal point of resistance located in the $1.22 region, with this consisting of the 50% Fibonacci retracement and the 200-week moving average.

Worth buying?

The announced roll-out of the Emma & Roe branded stores should underpin earnings growth over the longer term, which in combination with a conservative payout ratio provides meaningful upside to future dividend distributions. We also believe that the ongoing tax dispute with the IRD has been factored in by the market as likely going against the company, albeit dragging on. The shares are currently not trading, but will be listing on the ASX and back trading on the NZX on Thursday 7th July.

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

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