30 April 2018

The Super Investment Opportunity with Super Retail Group

The retail industry can be notoriously volatile, however when you read past the headlines to examine what stocks are performing strongly, it is easy to identify categories that show consistent buying trends. Often, in the retail industry, it’s the businesses that cater to enthusiasts or hobbyists that continue to prosper. It’s unlikely an avid fisherman would pass up a new reasonably priced lure or rod, particularly when the hobby itself is inexpensive, despite the state of the economy. Similarly, you are more likely to spend money on small things such as new tennis balls or a racket, rather than shelling out on court-side seats to an up-coming match.

Super Retail Group caters specifically to these types of enthusiasts, 50% of the group is made up of Super Cheap Auto, 40% is Rebel Sport and 10% is leisure company BCF. In addition, they have recently acquired New Zealand leisure company MacPac. MacPac is currently growing revenue at 20% per annum at high margins and with only a small footprint in Australia – under the Super Retail Group there is room for significant growth in this new market.

Despite the acquisition being relatively minor (the acquired profits equate to around 4% of existing group profits), the market reaction has been significant - the fall in share price removed close to $250 million from the valuation of the company. This drop in price suggests investors not only believe the $135 million invested in MacPac is now worth zero, despite strong sales momentum and profit margins well above the rest of Super Retail Group's businesses, but that the existing BCF business is now worth zero as well.

We, however, believe Super Retail Group to be a strong business and have taken advantage of its current situation to invest for these main reasons:

  1. Super Retail Group is the leading auto retailer in Australia by a significant margin. It generates consistent organic growth at attractive margins and continues to grow its store network.  It contributes strongly to group cash flow generation.
  2. Rebel Sport is the leading national sports retailer in Australia and continues to take share from a fragmented sports retailing channel, where independents are coming under increasing pressure from online retailers. Rebel sport is a crucial retailer to the strategy of global brands in Australia – Rebel is in fact one of Nike’s top 10 customers globally.
  3. BCF and MacPac are both strong brands that have resonance in their categories. There are always risks when making acquisitions – however, with no value currently being ascribed to this division as a whole, we feel there is very little downside risk to investors, conversely, there is potential for significant upside, should the underlying cash flows re-assert themselves.

 This stock is held by our Australian Equities Income Fund.

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This report has been prepared by Pengana Investment Management Ltd (ABN 69 063 081 612), Australian Financial Services Licence No. 219462) (“Pengana”).  This report does not contain any investment recommendation or investment advice and has been prepared without taking account of any person’s objectives, financial situation or needs.  Therefore, before acting on the information in this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs.

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