As is often the case, Nick Scali (ASX: NCK) delivered their half-yearly results early on in reporting season. Today’s ‘Stock in the Spotlight’ intends to provide readers with our first take on the result.
However, before diving into the details specific to the first half result, we believe it’s worthwhile reviewing where the business has come from. In our view, NCK has been one of the ASX’s most consistent small caps over the past decade. Though the business has undoubtedly enjoyed housing related tailwinds in recent years, we believe management has also executed well during a significant phase of store network expansion.
In many respects, NCK has many of the hallmarks that we look for in an investment. NCK is a highly profitable business, has a strong balance sheet, is a strong generator of cash and has a high quality, aligned management team steering the ship. Furthermore, as is obvious below, NCK has delivered substantial growth in earnings and dividends, all of which has been self-funded.
 

Figure 1: NCK Financial Results, FY2013 – FY2017.
Source: StocksInValue, Clime.
When it comes to capital management, we believe NCK management have acted sensibly since listing on the ASX over a decade ago. Put simply, NCK has made a profit, paid some of it out to shareholders as a fully franked dividend, before reinvesting retained earnings into the business to drive future growth. Invariably, this has resulted in the business delivering a sound mix of growth and income to shareholders over the past five years. Given NCK’s share count has stayed constant since listing (at 81 million shares), this has translated into significant growth in per share earnings, dividends and cash flow.
 

Figure 2: EPS, DPS & OCFPS, FY2013 – FY2019F.
Source: SIV, Clime.
This has also acted to maintain a very high level of profitability, as measured by NROE, which we illustrate below.
 

Figure 3: NCK NROE, FY2013 – FY2019F.
Source: StocksInValue, Clime.
Out first take on the NCK first half FY2018 result is generally positive. First-half revenue was up by 8.1% to $128m while reported profit was at the top end of management guidance at $23.5m, +15% on the prior corresponding period (pcp).
Gross profit margins again increased during the period, up by 90 basis points to 62.6%. Like for like sales (or ‘same-store sales’) was up 2.6% during the half. When coupled with the realisation of further scale benefits – with the company driving larger volumes through its existing infrastructure – net profit margins surged higher to 18.4% (17.3% pcp).
The store network specific to NCK’s core Nick Scali brand continued to expand during the period. Six new stores were added during the half, taking the total network to 52, with all new stores reportedly trading ahead of expectations. NCK’s initial foray into New Zealand has commenced positively, with the beachhead Auckland store noted to be the best performing new store across the entire network for the month of January.
The balance sheet of NCK remains robust, with net debt of just $4m, representing a net debt to equity ratio of a conservative 5%. NCK purchased the Auburn property during the period, which accounted for much of the company’s capital spending during the period. NCK now owns eight large format retail properties, all of which are held at cost on balance sheet. Operating cash flow was also sound for the half at $20.2m. In aggregate, this has afforded management scope to increase its interim dividend, which was up 14.3% on pcp to $0.16, fully franked.
Looking ahead, NCK expect to deliver profit growth of between 5% and 10% for the full year. Despite risks relating to the Australian consumer and the broader housing market remaining, we deem near-term guidance as a touch conservative. In line with this view, we would not be surprised to see management update their guidance in late April or early May.
 

Figure 4: NCK Outlook.
Source: NCK 1H2018 Results Presentation.
While acknowledging the inherent cyclicality of the business, we believe NCK remains well positioned to deliver a reasonable level of growth over the long-term.

Clime Asset Management owns shares in NCK on behalf of mandates for which it acts as investment manager.