Company: Pacific Brands (PBG)
Share price: 53 cents
Future value: 73 cents
Potential upside: 37%
Pacific Brands is an iconic Australian clothing manufacturer most famous perhaps for its Bonds underwear, but is actually a producer and retailer of many other products in three core segments: “Underwear”, “Workwear and Homewares”, “Footwear and Outerwear”.
Followers of the market may have seen headlines recently bemoaning a fairly poor set of half year results which saw the share price drop by 11 per cent or so almost immediately afterwards. However, on closer examination, the disappointing figures may present something of a buying opportunity. Investors with a larger than average risk tolerance may want to look beyond the initial headlines to investigate a little further.
PBG’s finances are a little complicated but in short the company needs to further improve and expand the aspects of its business that are making money, and turnaround or reduce expenditure in those that are not doing so well. If it succeeds in this mission, the rewards could be handsome.
In its recent results, PBG announced revenue increased 2.7% to $656.3 million while underlying Net Profits before Tax increased 6.1% to $56.6 million. The statutory Net Profits after Tax result was impacted by a $276.0m pre-tax write down in goodwill and brand value, with the majority attributed to the work wear division.This resulted in NPAT dropping 15.1% to $33m although management insist this will improve in the second half, which history suggests is a more profitable period.
PBG’s core divisions of Underwear and Sheridan Tontine produced strong results, with sales increasing 10.0% and 11.1% and EBIT increasing 23.7% and 22.9% respectively. Workwear produced a flat revenue result and a 39.3% lower EBIT result which induced the intangible impairment. Brand Collective recorded a 13% lower revenue and 70.4% lower EBIT, which also resulted in an intangible impairment.
However, encouragingly for a turnaround play (which is how investors should view PBG), some areas in which management have focused real efforts and resources have yielded results.
So-called “direct to consumer” sales, a much higher margin channel, increased $48.3m through the expansion of company owned retail and online. This D2C channel now accounts for 22% of sales and will be a focus of management activity as the year goes on. Overall, Bonds sales were up 20% and Sheridan sales up 15%. Retail now accounts for 19% of the business, up from 14% last year, which is a positive move, and online sales have trebled to account for 3% compared to just 1% last year.
From a balance sheet perspective we are comfortable with its debt levels and its ability to service its debt. However it does face headwinds in the form of increasing competition and a weakening Aussie dollar, which increases its costs of manufacture from offshore.
What investors must decide is whether the management has the skills to guide PBG back to strong growth. The market seems sceptical but with a price discounted so deeply to what we believe is its true value, potential investors have a reasonable buffer against valuation and thus a likelihood of an investment gain over the next few years.
++Fair or forecast value is the price placed on the share after calculating a range of factors including profitability, assets, debt and, most importantly, Return on Equity – the same measure used by Warren Buffett to assess long-term value.
Shares are assessed by Clime Asset Management to calculate which companies are undervalued or over-valued based on their return on equity. History has shown that the most successful companies are those that produce the highest returns per dollar of shareholders' equity, yet this is not typically how shares are valued. This system highlights shares that are undervalued on this key measure. Shares are expected to reach this value in 3-5 years, as price tends to follow value in time.
Information is intended as a guide only. For specific advice contact your financial services professional.