ASX code: NCK
Share price:
Industry: Retail
Forecast FY2018 Distribution: $0.33 per share
In a grinding retail landscape clouded by the impending arrival of Amazon, few retailers have escaped the wrath of anxious investors seeking a swift exit. One exception is that of leading furniture retailer, Nick Scali (NCK), a company that has surged over the past 12 months off the back of strong sales growth and continued margin expansion.
Founded in 1962 by Nick Scali and listed on the ASX in 2004, NCK has an excellent track record of delivering consistent earnings growth and a steadily increasing stream of fully franked income to shareholders.
Management recently upgraded full year earnings forecasts to a range of $36m to $37m, up 40 per cent on FY2016. Same store sales growth has continued at double digit rates, largely reflecting significant volume growth across its store network.
We expect NCK to move into its new Sydney distribution centre (DC) within the next two months, which will see its capacity increase by 250% and assist the business in realising further efficiency gains.
The balance sheet remains in sound shape, with net cash of about $16m. Also noteworthy is the fact that NCK directly owns 7 properties that are held on balance sheet at cost, suggesting some latent value exists in its asset base.
Another feature of NCK’s financial performance has been the strength and consistency of its cash generation. Operating cash flow was $18.2m for the first half.
Though the business has been around for decades, we remain excited about the company’s long-term prospects. NCK has guided to a further 7 new stores to be opened in FY2018, suggesting store growth of about 15 per cent on its existing footprint of 45 stores. This includes the company’s entry into the New Zealand market, which we understand has been in the planning stage for some time.
Management’s existing store network target remains at 75, while further offshore expansion and acquisitions present as further long-term potential growth levers.
On current forecasts, NCK still trades at a discount to market multiples and our intrinsic value of about $7.90. Concurrently, NCK offers investors with a solid forward yield of about 4.6 per cent. So, while we still see significant scope for future growth, investors are also rewarded when it comes to regular income.
Originally published in The Australian, Tuesday 9th May 2016. Written by Adrian Ezquerro, Senior Analyst for Clime Smaller Companies Fund.