Are Credit retailers safe?
BULLISH THOUGHTS took a good look at Edgars’ trading update. The numbers seem quite interesting. The counter is currently on a P/E of 17x at a price of 9.5c and market cap of $29.5m as of Friday and not really out of range with its peers.
Just to recap on the performance numbers: Group turnover for the five months grew 85% to $15,2million. Retail unit sales grew 47.1% and a gross margin of 51.5% was achieved compared to 49.0% last year.
Dollar figures grew faster than units partly due to price increases filtering through after the cotton and wool price increases last year.
The number of debtors' accounts grew to 127,910 from the 111, 199 reported at year‐end and the debtors' book currently stands at $12,2million. Monthly collections were an average of 24% of opening debtors. Bad debt handovers as a percent of lagged debtors were 0.49%.
Borrowings stood at $16,7million at the end of May at a cost of 16.49% per annum. Financing tenor and rates have improved with a further $5million deal being clinched for a two‐year period. The weighted average rate of interest is projected to decrease to 16% from the 18.2% in December 2010.
Management expect the half year top line results to be around 90% up on last year while, at PAT level, we should produce a modest profit against the $1,7million loss last year.
Edgars is a brand Bullish Thoughts used to adore especially when he left college 5 years back. The first two nice suits Bullish Thoughts ever wore were from Edgars. Anybody remember the Bradford and Enzo Munari shirts? And on credit too?
Today, it’s no longer his preferred apparel retailer largely because of quality issues and diversity of brands across the entire apparel range. It’s kind of tilting towards the very low income earners.
Also the company seems to be pushing everyone towards credit? Otherwise how would one explain the fact that a shirt can cost $30 on both cash and 6 month interest free credit? Even if one does not have anywhere to deploy the cash resources, the opportunity cost of making a cash purchase is just ridiculous. It is common sense to just go and max out the credit card.
Bullish Thoughts thinks management could improve the cash generation with simple price differences that takes into account opportunity cost. The last time I checked, almost all universities (of note that is) now teach the basic financial maths to accountants and one would have thought it would come in hand in this scenario.
We can assess the time it takes to get the dollar of a suit to hit the till by the following maths:
Cash conversion cycle
Number of days of inventory + number of days of receivables – number of days of payables.
Edgars’ management strategy is whittling down number of days of inventory and ballooning number of days of receivables through pushing credit sales. Granted, credit sales are the bread and butter of apparel retailers but here is an idiosyncratic situation compared to the conventional world:
Edgars is facing an excessively high US$ finance cost of +16% p.a.!
With a cost of funding of 16.5% p.a., Bullish Thoughts is therefore convinced that management can do a better job of improving the cash conversion cycle, retire the more expensive portion of the debt and refinance the remainder.
Zimbabwe’s financial markets are not that sophisticated as yet to have refunding covenants in loans!
Given that most shareholders are probably looking at a return on capital of circa 15%-20%, how can the company achieve that on an average finance cost of 16%? The numbers just don’t add up.
Plus with the distress being already felt in the financial sector, multiple collateralization of same cash flows/salaries by debtors, the book itself may become largely adversely classified sooner or later. And no financial institution can do debtor factoring especially when credit is given to sub prime borrowers? Does this sound familiar?
You are the investor, so tell us.
JRTM Returns
The Meikles Hotel has always been an enigma. It’s still not the kind of place that one would ordinarily go just to have a drink with folks and have some insight into corporate happenings. Bullish Thoughts loves the tea and sandwiches though! Meikles Hotel still commands respect especially among the international travellers.
It is also in the same stable with TM Supermarkets (whose deal with Pick n Pay the market can’t wait to have approved) and the departmental stores. It also used to have the famous Bulldogs Pubwhich was the kind of pub one went to if on a mission to show style. After all you could drink yourself lights out on a credit card. Bullish Thoughts misses the glamour of the place. Unfortunately after losing the franchise, the last time we checked some two males and a chick were caught demeaning Sodom & Gomorrah in our pub!!!
Bullish Thoughts is not quite sure whether to be happy or be indifferent that the original or almost original owners of the Meikles Africa group are about to come back with JRT Moxon set to be the chairman following his despecification. There is/ was something of a family touch especially at the hotel side of the business which would be very welcome.
We wait to see if the entity would reclaim the blue chip status and the reputation of excellent tea service in the afternoon!
Pentagon, Philadelphia etc
Bullish Thoughts is happy to say that while driving through Borrowdale recently, he noticed that works seem to have resumed at the Pentagon Hotel. He is just hoping that Phil is not going to divert resources from this project to a Bugatti Veyron.
Prescribed Assets
MoF principal was reported to have threatened to invoke the Insurance Act and hike prescribed asset ratios. Bullish Thoughts also remembers the threat to invoke the Banking act if banks didn’t increase their lending ratios (even though the bulk of deposits were hot money).
There are two sides to this. Prescribed assets by a broke government versus placing deposits with a strained financial services sector. After having witnessed catastrophic government default as late as Jan 2009, Bullish Thoughts is not convinced that the government has accumulated the requisite credit ratings to interest investors even those arm twisted.
At the same time, the Zimbabwe financial market lacks the appropriate securities. Everyone is scared of the Rio Zim BAs and other totem-less securities being offered as securities for our US$.
However, faced with such a choice, it looks like the government assets are a better devil now that inflation is no longer there to repay the debt for government.
However Bullish Thoughts says if the subscription rate was so pathetic at ratios of 5%, 7.5% and 10% for general insurance, life assurance and pension funds respectively, what makes the Honourable Minister think that a higher rate plus some prescribed threat will improve appetite. Is the insurance sector that cash rich as yet? Maybe the Minister and IPEC knows something that the rest of the market doesn’t.
Just for the record though: NSSA is not a proxy of cash resources in the insurance sector!
Invest Wisely!
Bullish Thoughts
Email: bulls@bulls.co.zw
Twitter: www.twitter.com/BullsBears2010
Blog: http://bullsnbearszimbabwe.blogspot.com/
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