MHJ - Michael Hill International.

[upside_umop]

Looks pretty good to me Belg.

Operating cashflow up significantly, due to PCP.

Summary of Key Points (all values stated in NZD unless stated otherwise)
Operating revenue of $288.846m up 7.3% on same period last year
Same store sales were 1.7% up on same period last year
EBIT of $34.775m up 9.2% on same period last year
Net profit before tax of $32.337m is up 12.7% on last year
Net profit after tax of $26.297m is up 11.5% on last year
Revenue collected from Professional Care Plans of $14.411m for the period
Net debt of $10.728m at 31 December 2011 down from $49.163m last year
Operating cash inflow of $46.800m up from $21.040m last year
7 new stores opened and 1 closed during the period
Total of 245 stores open at 31 December 2011
Interim dividend of 2.0 cents per share up 33% on last year
Equity ratio of 56.2% at 31 December 2011

[Lizard]

Those professional care plans are going to be tricky to value liabilities for. Will be interesting to see how it goes. I see the liability is written down to nil over 10 years, despite being "lifetime". Which is interesting in itself. I guess there will be plenty of takers investing in the lifetime care plan for the precious engagement ring, only to have it thrown back at them... lots of people prepared to pay for extended warranties they never use.

[upside_umop]

Liz, I think they are saying that for accounting purposes, after 10 years people won't bring their jewerelly in anymore and therefore they won't have a liability. I think they will still honor the lifetime plan, but as you say, people just won't end up using them. 1 or 2% of people might bring them in after 10 years?

PCP looks like a winner. Maybe not for the people buying into the plans though.

[Halebop]

I've had an involvement with a number of warranty style schemes over quite a few years. The keys to success is typical retail stuff - price point and volume - and a good understanding of risk pricing (this isn't what retailers are good at so they usually need to involve someone else). As suggested, the claims tail on these schemes tend to die off quite suddenly at x point in time - x varying according to product and customer demographics.

The problematic aspect of these schemes is that they tend to perform worst exactly when the retailer doesn't want them to - recessions. Bad economic times encourages customers to make claims. In good times more of them opt to ignore the problem and just buy something new. But properly priced, if you are prepared to take sometimes lumpy returns (profits can disappear just because a numbers guy told you so and 1 person in 100 will fully understand the math), they can add a nice source of cashflow.

Even a mispriced scheme can still work OK because you are getting the cash years before you need to spend it. Because Michael Hill plans to be opening hundreds more stores in the future, temporarily free cash is quite useful, even if the warranty subsequently only breaks even or makes a small loss. Better yet, if the warranty makes money, they achieve a Buffett style "free float".

[scamper]

Do you realise how far-flung your influence is, Belgarion?
I make it ~ 13% increase since your post.
Is MHI still "squarely undervalued" at 100 cps? Cheers.

[upside_umop]

Great post Halebop. I think this PCP looks like a high margin operation.
Scamper - yes. Still undervalued...
MHI has a scalable business model that just got so much better with PCP really taking off.
To think these guys eventually want 1000 stores...if they perform as they always have (check out some of their presentations for 6 monthly growth stats....increased every half since ages ago) it can only mean one thing over the long term.

[upside_umop]

http://www.stocknessmonster.com/news...=NZSE&N=220491

Are they allowed to do this? They did not disclose to the market that they were buying 5% back before they launched their conditional offer (it's not shown on ASB Sec in any case).

What of those people who sold recently before the offer? This has obviously taken the market by surprise.....

[upside_umop]

Opps, just noticed this announcement references back to 14 January 2011 (original offer for partial takeover). It's odd that it took so long for it to come through and it still looks strange!

In any case, explains the volume over the past couple of days. MHI looking good.

[Halebop]

Have been looking at MHI’s half yearly results, hoping to make sense of their “Professional Care Plan” (PCP) numbers. There isn’t much to go on;
Revenues up very strongly in the half year results $14.411m, only $1.466m of which was recognised due to a 3 to 10 year expected exposure period.
The balance sheet now shows $21m in deferred revenue – cash will have shown a similar increase although this would have already been deployed elsewhere.

The cash benefits show through on aggregate cash and borrowing balances, which have improved markedly in the last 18 months due to higher operating cash-flows and profits.

The workings of the PCP are vague. It appears commissions or sales incentives are expensed as there doesn’t appear to be any recognition of deferred acquisition cost. When you pay for commissions and other sales expenses but the benefit of that sale extends beyond the current reporting period you may opt to defer recognition of that expense until the revenue is also recognised. If this is the case current profits on PCP are understated (or ”conservative”) i.e. If you imagine there is a 10% or 20% commission but only a 10th of revenue is recognised then there is no benefit to profitability in the current period. I’d be interested to get a clearer explanation of the mechanics of this line of business.

The balance sheet is interesting. In a decade or so Deferred Revenue and proceeds from the balancing cash receipts are likely to make up 30-50% of the balance sheet. Investors might consider they then effectively own a warranty insurer with a retail arm. Assuming the PCP is priced correctly, all that free cash will have largely paid for store expansion while profitability will probably have left the company debt free to boot. I’d hope not but perhaps they might be tempted towards corporate activity? In light of the Hill family’s recent “creep” for control perhaps the corporate activity will be privatisation?

Pricing the PCP correctly is the tricky part. The lifetime PCPs are effectively a liability with a very long tail. Even 10 years might not be enough time to know if the they are making money on them. While this might make lots of money, the risk profile of this revenue stream is very different from a retailer of jewellery.

Overall I view current performance and recent historical trends favourably. Would like to see a few more store openings but let’s face it the retail environment has been more hostile in recent years, I can also recall a share trader debate on MHI growth rates several years ago, with more conservative pundits using rates as low as 4ish%. I questioned this at the time because the time period used to generate this average was not typical of long term performance. Looking back now simple average NPAT growth for the last 7 years has been 14.3%. “Owner Earnings” have continued to be tremendous - $144m over 7 years, paying for increased dividends, organic growth and debt reduction.

On the negative NZ domiciled investors have lost imputation credits on their dividends. For a company that has delivered benefits to shareholders for years it appears they could have tried a bit harder to look after local shareholders. The franchise sale and aggregate benefits aren’t quite being evenly shared, albeit the bottom line has improved. The Hill family hold their shares through an Australian registered company, thereby capturing the Australian franking benefits.

A few basic measure snapshots follow – some components for 2004 and 2005 should be viewed with a pinch of salt as reporting requirements changed in 2006 and so I estimated a couple of missing parts (Notably Cost of Goods Sold and Wages). Occupancy Ratio is operating leases (mostly Rent) expressed as a percentage of sales (Haven’t shopping centre owners done well?)

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[kizame]

Damn, one of my picks for this year,but still a whole year to go yet haha.