Shares of Smiths City Group [NZX: SCY] climbed 8 percent after a report by Edison Investment Research said the furnishing and appliance store's plans to expand to the North Island hold promise, and the stock is undervalued relative to its peers.
Edison puts fair value on the company at 83 cents per share, valuing Smiths City at $44 million. That's a 69 percent premium to the 49 cents the shares were trading at before the release of the report, which was compiled at the Christchurch-based company's request. The shares rose 4 cents today to 53 cents, and have climbed from a two-year low earlier this month.
Smiths City has about 4.7 percent of the national furnishings and appliance market through its 26 South Island stores and 14 North Island stores, which covers about 47 percent of the country's population, Edison said. The company doesn't have a presence in Auckland, the most populous, fastest-growing region in the country, having put expansion plans on hold after the Canterbury earthquakes in 2010 and 2011 when its Colombo street flagship store in Christchurch was significantly damaged.
In June, the company's chairman said the earthquake upheaval was effectively behind the company, and signalled further North Island expansion, moving into new premises in Palmerston North and Rotorua in November. The company also said it is considering expanding further into the Auckland market, with structural changes to the organisation meaning it was well positioned to, should an opportunity arise. Smiths City's entry into Auckland would be the best via an acquisition, Edison said.
Annual profit fell 24 percent to $4.1 million for the year ended April 30 as revenue fell 0.8 percent to $220.7 million on weaker appliance sales, the company said. Smiths City is shifting to focus on its furnishing offerings, which offer more stable margins, as the appliance sector grows increasingly competitive, Edison said.
"The company was significantly affected by the Christchurch earthquakes in 2010 and 2011, but is now ready for expansion and growth," Edison analysts Neil Shah and Victoria Buxton said in the report. "Based on modest organic growth our valuation is still some 69 percent than the current (49 cents) share price, implying the company is trading at a noticeable discount to its peers."
Shares of Smiths City cheaper than the company's peers, trading at a price-to-earnings ratio of 5.1 times, or 8.6 times on Edison's valuation, compared to the median PE of 15.7 times compared to the six constituents Edison lists as peers. Smiths City's gross dividend yield of 7.9 percent, or 4.7 percent at Edison's valuation, is around the median of 7.3 percent.
Among the listed retailers Edison includes as Smiths City's peers are The Warehouse, New Zealand's largest-listed retailer which has a market cap of over $1 billion, and a PE of 14.9 times, Michael Hill International, the Brisbane-based jeweller with a market cap of about $479 million and a PE of 12.5 times, and Briscoe Group, the discount homeware business which has a market cap of $616 million and a PE of 16.6 times.
Edison forecast net profit to be $5.1 million in the 2015 financial year on sales of $224.8 million, growing to profit of $5.2 million in 2016 on sales of $229.2 million, with modest revenue growth in the South Island and North Island expansion holding the greatest promise of growth.