PGR - PAS Group

[Lizard]

The chart isn't too inspiring, but I have bought into this stock on a value basis and am anticipating results due 28 August. Bit of a gamble, especially as there will be a substantial release from escrow from that time.

Screen Shot 2015-08-10 at 9.49.23 PM.jpg

PAS Group is a clothing retailer/wholesaler, with a number of Australian brands. Listed in June 2014, the shares have more than halved from the listing price of $1.15, to currently sit around 50cps. This has been largely on the back of a good first FY14 result, followed by margin slippage in the HY15 (the usual well-worn pattern of late-financial year listers!). Bit of recovery in the second half should see a stronger finish. Promising a 70-80% dividend payout, which should make for a good yield metric based on EBITDA forecast at last update.

Chart could go either way. Unfortunately, it's too early to tell the quality of management and I haven't shopped the brands either, so any thoughts welcome.

[Wolf]

In regards to the shares in escrow:

CEO, Eric Morris, representing the Morris Family Trust, has indicated that the shares in escrow held by thattrust will continue to be held for the foreseeable future.

But he could be just saying that... haha

[Lizard]

Result came in on target, with underlying NPAT $8.8m and final div of 3.1cps (plus franking). Price jumped to 59cps yesterday, but that still puts it on a PE of just over 9 and yield of 8.5% (+ franking). There are some headwinds, particularly in the form of currency effects on costs, but given the weak first half last year, there should still be room for some improvement in the coming 12 months.

Expecting more from this one, particularly before it goes ex-div.

[Joshuatree]

Aus brands offering 63c a share.

[Wolf]

Way to low in my opinion, will be interesting to see what happens.

[Joshuatree]

Yes current price 64c

[Joshuatree]

Coloseum looks to have sold a big chunk or all its takeover holdings not sure what is going on here?.Meanwhile PAS bolts on another business, earnings accretive JET Swimwear business with a 30 year heritage with good margins("itsy bitsy teensy weeny bikinis"?). S/P weaker now that tension has been removed re 58.5c atm

[Wolf]

There was an update today from PGR today that they are divesting Metalicus. Here's my summarized thoughts.

Divestment
The divestment of Metalicus is a step in the right direction for PGR and is quite significant. Metalicus has been under performing due to being unable to evolve their products for their target audience. It has required investment and a large time commitment from management. With it divested management can now focus on growing existing operations and adding new ones. The divestment is based on asset value (ie no material gain or loss will be recognized) which hasn't been disclosed but I doubt it will be material considering all goodwill/brand, and a portion of equipment etc has been written down. I'm expecting a figure of roughly $4m based on this.

Coliseum
There has been speculation on here that Coliseum could put in a higher bid (they well could) but I think it's unlikely any time soon. The takeover offer seemed like a fast way to acquire a large holding to me rather than to take over the whole entity. Coliseum are supportive of PGR's strategy and in my view are taking a long term outlook with the business. When they made the offer any short term holders likely exited and the majority of holders now likely have a longer term focus.

Current Value
For FY2016 i'm expecting EBITDA of $22.2m and $14.6m EBIT which puts PGR on an EV/EBIT of 5.8 which is very cheap. The real question for me though is how cheap. PGR arguably deserves to trade at a discount due to a poor history since listing, liquidity issues from Coliseum's large holding and a tough retail environment. My DCF model indicates fair value of $1.08 based on conservative inputs but I think comparative and transaction multiples are a better proxy for intrinsic value. This is because retail stocks trade at a discount to the broad market due to a number of factors. The median EBIT takeover multiple for this sector in the last five years is 8.1, which would give PGR a value of ~91c. However for the reasons above PGR should trade at a discount to this and using an EV/EBIT multiple of 7 I have a current price target of ~80c.

Outlook
Looking ahead analysts expect a period of slower growth which I previously agreed with. Store roll out has been expected to pause in segments such as BlackPepper while management focus's on existing stores and working on Metalicus. However now that they have divested this business there is the opportunity to possibly roll out further stores or make a larger quality acquisition which could lead to moderate growth. In the 2016 prelim report their store projects will be an important indication of future growth. There is also potential for growth in their wholesale segment. PGR should be able to achieve moderate growth in Designworks through exporting Toys R Us to Japan and new opportunities. Private labels operate in cycles, and while they lost Target, they could get them back in the future.

The second source of earnings growth going forward will be margin expansion, margins are lower than they have been in the past and some of this can be put down to Metalicus. The question is how much since individual store profit isn't disclosed in their reporting. As a slim margin business if retail margins can return to 2013/2014 results there will be a material increase in earnings and hence value. I don't expect wholesale margins to return to historical figures as margins will now be lower with their licensing model due to licensing royalties. Although it's worth noting that their licensing model is much less risky than private labels such as target.

Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
	2012	2013	2014	2015	2016 E	2017 E
	  	  	  	  	  	  
Retail EBITDA	13.7	16.4	18.5	17.6	20.1	20.4
Margin% Retail Revenue	13.3%	14.3%	14.3%	12.3%	12.4%	13.0%
WholeSale EBITDA	19.6	18.8	18.3	9.9	12.5	13.5
Margin% Wholesale Revenue	16.3%	16.0%	15.8%	9.0%	9.6%	10.0%
Corporate Costs	6.1	6.9	5.1	7.3	10.3	10.9
Margin% Total Revenue	2.7%	3.0%	2.1%	2.9%	3.5%	3.8%
Total EBITDA	29.5	29.8	31.7	20.2	22.2	23.0

Conclusion
Overall at the current price PGR is cheap and in addition to a strong dividend yield they're arguably worth 80c+ so should experience some capital gains. Looking forward if a few things go right they could be worth considerably more and price targets of $1+ come into play. Currently I don't hold as I prefer holdings elsewhere, but if they make the right acquisition or there is further evidence of the catalysts above in the prelim report I would reconsider.

[Joshuatree]

Superb analysis Wolf ,many thanks. S/P up 4c in last few days. Will hold for now for the rerate which i think will come. Divesting the problem child metalicus maybe the catalyst

[Joshuatree]

Mkt cap re $94 mill undiluted
NPAT $11.3 mill up 14.3%
EBITDA up 16.6%
Sales up 20%
Inline up 149%
$8 mill cash on hand
Tot divs for year 5.2c
Outlook same/ more /positive