Just when you thought Goldman Sachs could not come up with a more ludicrous valuation for a retailer, the investment bank that brought the world Ocado surpasses itself with this report on SuperGroup:
SuperGroup offers a unique opportunity to invest in the early stages of a compelling growth phase, with UK retail store, online and international wholesaling expansion. We initiate with a Buy rating and add the stock to our Conviction List. Our DCF based 12-month target price of 2100p implies 75 per cent potential upside to the current share price. Our EBIT forecasts of £49.4 mn for 2011 and £75.4 mn for 2012 are 25% and 42% ahead of consensus, respectively, as we take a positive view on the group’s margin growth from increasing scale and operational leverage. We add the stock to our UK Relative Value List with Marshalls (Neutral) as a counter balance.
Early stages eh? £21 a share target price? Upside potential of 75 per cent?
Where on earth do we start?
First up, it’s worth a quick recap of SuperGroup, which remains majority-owned by founder Julian Dunkerton. SuperDry, the brand that accounts for nearly all of SuperGroup’s sales, was actually launched six years ago. It specialises in T-shirts emblazoned with faux Hiragana — which for the moment are modish enough for shopping centre owners to give rent breaks just for the privilege of hosting a store. The company was listed at 500p in March, valuing it at £395m. Today, it’s worth slightly north of £1bn. And at £21 a share its market value would be £1.65bn.
Let’s put that figure in perspective. It’s more than 6.5 times the valuation afforded Ted Baker. It’s more than 32 times that of French Connection. Indeed, it’s around £100m more than the current market cap of Dixons. And this for a business expected to generate sales of just £236m next year.
But wait! Goldman reckons sales will double by 2013 as SuperGroup opens a further 108 stores in the UK (it has 42 at the moment). Then you add in the franchises, the wholesale, the online stores …
Based on our analysis of comparative companies such as Abercrombie & Fitch and its store build-out phase, we believe SuperGroup is currently two years into a five year cycle typical of fashion retailers. The Superdry brand is at the heart of the business (94% 2010 sales) and underpins the expansion opportunities across Europe and Internationally.
The group’s growth strategy is built on the following core business areas.
- Retail, which consists of Cult and Superdry standalone retail stores, House of Fraser Superdry concessions and a fully transactional online offering for all its brands. We forecast UK Cult and Superdry stores will grow from 42 in fiscal 2010 to 150 in 2015
- Online is a growing part of the sales mix which we forecast will grow from 5% of retail sales to 20% 2011 to 2015.
- Wholesale, which includes wholesaling, franchised stores and licensees and offers the group considerable opportunity for International expansion with low capital intensity. We forecast wholesale units to grow by 40-45 units pa.
But are there really that many people out there who want to wear ersatz Tokyo leisurewear designed in a warehouse in suburban Cheltenham?
If Thursday’s price action is anything to by, the market seems to think so.
And perhaps they are right.
After all, if a jeweller that makes silver charm bracelets is worth $6.5bn, perhaps SuperGroup really is undervalued.
In fact it’s difficult to know which valuation is harder for investors to wear.
Then again …
Here’s an interesting footnote from the “risks” section of Goldman’s report:
Reversal of tax deductions claimed in respect of deferred tax assets – prior to listing the group underwent a reorganisation from which it purchased £187 mn of intangible assets from the Laundry and Cult Clothing businesses. Based on straight line amortization over 10 years, the group believes it will receive £18.7 mn pa of tax deductions. These deductions result in a lower tax charge of 18% in 2011 and 2012 based on our forecasts and if these tax deductions no longer existed, the tax rate would rise closer to the UK corporate rate, to 27% in 2011 and 26% in 2012. This would result in an 11% reduction to our EPS forecasts for 2011 and a 9.5% reduction in 2012.