Dick Smith Holdings Limited
ASX code: DSH
Share price: $0.75
Industry: Retailing
Forecast FY2016 Dividend: 8c
Dick Smith Holdings (ASX code: DSH) has come under the spotlight recently with their downgrade to FY16 earnings as the company focuses on clearing out excess inventory. This was announced at their recent AGM resulting in the share price falling approximately 50% over the proceeding few trading days.
Much has been written about the risks of investing in a business recently floated by Private Equity with DSH being no exception, however as investors we need to focus on the intrinsic value of the business which is driven by the underlying earnings of the business and not who has previously owned the business.
A brief overview of the business, DSH is consumer electronics retailer in Australia and New Zealand operating both physical stores and via various online platforms. The business was previously owned by Woolworths before selling to Private Equity in 2012 and eventually floated late 2014. Its current strategy remains one of growth with store numbers expected to grow by 15 new stores per annum in the near term and also growing higher margin private label and small appliance products.
Turning our attention to underlying earnings, DSH Management at the recent AGM provided FY16 NPAT guidance of $5m – $8m lower than previous guidance of $45m – $48m with the bottom end of the guidance sitting at $37m. This was driven by poor trading through October and a desire to reduce inventory levels and gearing. Whilst recent consumer confidence indicators have pointed to an improvement in conditions, taking a below NPAT guidance of $33m (approximately 10%) and the applying the bottom end of the targeted payout ratio of 60% would result in a DPS of 8c (fully franked) representing a yield of 10%+.
The balance sheet did take on some gearing during the year increasing to 24%, whilst still considered manageable, Management’s focus on cash conversion should see this gearing level prudently reduce over the course of the year.
In our view, DSH is an attractive investment albeit at the riskier end of the spectrum with sizable capital gains possible over the medium term, collecting a healthy 10%+ fully franked dividend yield while you wait.
This issue of Dividend Detective was written by Stephen Wood, Senior Analyst. He owns DSH securities.