|
Mr Price Group (MRP) will be the stock in focus: (Price at time of writing: R170.78 as 14 November 2016)
|
Related Topics |
Background and overview of Mr Price Group (MRP)
Mr Price group is a retailer active in the fashion and clothing segment of the market. The retail in apparel, homeware and sportswear and is one of the fastest growing retailers in South Africa. Mr Price's cash sales constitute 82.6% of total sales and the group is focused on remaining a cash-driven retailer. This will continue to differentiate the group from its competitors and produce cash flows that will fund our continued growth and enable an attractive dividend cover.
Their brands include:
Mr Price
Mr Price Sports
Mr Price Home
Sheet Street
Milady's
Mr Price has a very strong foothold in the South African retail clothing market, and this offers a strong value investing proposition for us.
Their brands include:
Mr Price
Mr Price Sports
Mr Price Home
Sheet Street
Milady's
Mr Price has a very strong foothold in the South African retail clothing market, and this offers a strong value investing proposition for us.
Scroll over or click on the funnel chart to get more details of MRP latest financial results
Financial review:
From the funnel chart above its clear that MRP is achieving pretty strong margins, As is shown by the orange (profit before tax) and green (profit after taxes) blocks. Their net profit margin (green block as percentage of blue block) is 10%, which is extremely healthy for a retailer in South Africa (but it is lower than their net profit margin achieved 12months prior where their net profit margin was well over 11%). Indicative of margins being squeezed in the sector (especially due to strong competition from H&M and Cotton On).
The graphic below shows the contribution of some of MRP's operating divisions to their revenues and profit before taxes.
As can be seen from the pie charts the majority of Mr Price's revenues and profits are earned from their apparel. With their home ware making up about a quarter of sales and profits. Higher margins are achieved at both their homeware and financial services division when compared to their apparel. This can be seen by the fact that apparel's contribution to operating profits being smaller than its contribution to turnover while the other two divisions shows increases in terms of contributions to operating profits compared to contribution to turnover.
Earnings per share came in at R3.71 (for the 6 months). Assuming similar profits are made for the next 6 months it will give MRP earnings per share of just over R7.40 for the year. Putting MRP on a PE ratio of 18 ( a lot lower than the almost 22 PE it was trading at during our last valuation in April 2016). The lower PE is largely due to significant drop in the share price over the last 3months. MRP's share price dropped by over 40% in the last 3months. Even though MRP's PE ratio has come down significantly is still pretty steep for a mostly clothing retailer. But since the next 6 months covers the December holiday period one can expect a slight increase in the next 6 months profits per share.
Cash generated a share came in at R4.56 a share for the half year. Pretty similar to their earnings per share. On a cautionary note, trade and other receivables outstanding to MRP is still around R2billion. This has not improved compared to a year ago. So potential buyers needs to take into account that account holders might struggle to pay back outstanding debts to MRP (especially in this economic environment where interest rates are rising and inflation increasing substantially).
Another worry is the size of their inventories. It is up from R1.8billion 12months ago to almost R2.1billion. The question is whether the inventory build up is because they expect a bumper christmas season or whether they are struggling to move their stock from their stores. We know most retailers experienced significant mark downs on their winter clothing as the winter was warmer than expected and less winter clothes were bought. This saw MRP and other clothing retailers cut prices in winter clothing in order to move the stock. Negatively affecting margins. This is partly why MRP's net profit margin is lower than the previous period.
On the plus side, assuming the half year dividend announced of R2.28 per share is repeated at year end, MRP is currently trading at a dividend yield of over 4%. Which is pretty strong.
Earnings per share came in at R3.71 (for the 6 months). Assuming similar profits are made for the next 6 months it will give MRP earnings per share of just over R7.40 for the year. Putting MRP on a PE ratio of 18 ( a lot lower than the almost 22 PE it was trading at during our last valuation in April 2016). The lower PE is largely due to significant drop in the share price over the last 3months. MRP's share price dropped by over 40% in the last 3months. Even though MRP's PE ratio has come down significantly is still pretty steep for a mostly clothing retailer. But since the next 6 months covers the December holiday period one can expect a slight increase in the next 6 months profits per share.
Cash generated a share came in at R4.56 a share for the half year. Pretty similar to their earnings per share. On a cautionary note, trade and other receivables outstanding to MRP is still around R2billion. This has not improved compared to a year ago. So potential buyers needs to take into account that account holders might struggle to pay back outstanding debts to MRP (especially in this economic environment where interest rates are rising and inflation increasing substantially).
Another worry is the size of their inventories. It is up from R1.8billion 12months ago to almost R2.1billion. The question is whether the inventory build up is because they expect a bumper christmas season or whether they are struggling to move their stock from their stores. We know most retailers experienced significant mark downs on their winter clothing as the winter was warmer than expected and less winter clothes were bought. This saw MRP and other clothing retailers cut prices in winter clothing in order to move the stock. Negatively affecting margins. This is partly why MRP's net profit margin is lower than the previous period.
On the plus side, assuming the half year dividend announced of R2.28 per share is repeated at year end, MRP is currently trading at a dividend yield of over 4%. Which is pretty strong.
A few financial ratios for MRP (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 0.43 (more than 2 shows high levels of financial leverage).
- Current Ratio: 2.54 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 1.58 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 11.65%
- Return on Equity (ROE): 16.65%
- Net Profit Margin: 10.05%
- Dividend Yield: 4.16%
Valuation:
Based on MRP's brands, its footprint and its latest set of financial results we value them at between R150.70 and R151. We therefore feel at its current price MRP does look like it is offering some value. The market sell off in MRP seems to be over done and MRP offers long term investors a good entry point at it's current level. In our previous valuation we valued the company at just over R160. The downgrade in the valuation price is due to the fact profits per share came in a lot lower (almost 15% lower) than the previous period. And we are therefore adjusting our valuation lower largely based on the decrease in earnings per share. The rest of MRP's financial ratios as shown above looks very strong and a dividend yield of over 4% is not to be frowned at.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.