Being able to identify shares that could be a turnaround story, or are worth a lot more than the market thinks, is a very good skill as an investor. It can mean finding a stock that may outperform the market, even if that business does not have the best management, the best balance sheet or the best long-term future.
The Wilson Asset Management (WAM) listed investment companies (LICs) have a good track record of finding those hidden gems. WAM Capital Limited (ASX: WAM), WAM Research Limited (ASX: WAX) and WAM Microcap Limited (ASX: WMI) between them own roughly 17.6 million shares of Specialty Fashion Group Ltd (ASX:SFH), the bulk of which were bought this week.
Some readers may know Speciality Fashion as the owner of several clothes store chains like City Chic, Autograph, Katies, Millers and Rivers.
However, Specialty Fashion will soon divest most of those. It's selling Autograph, Crossroads, Katies, Millers and Rivers to Noni B Limited (ASX: NBL) for $31 million and will retain City Chic.
The funny thing about this transaction, is that the group of businesses it's selling made a combined earnings before interest, tax, depreciation and amortisation (EBITDA) loss of $6.2 million and $25.7 million earnings before interest and tax (EBIT) loss for the 12 months to December 2017. City Chic has consistently been the most profitable business out of the lot.
After the sale Speciality Fashion will be more profitable and have a lot of cash on the balance sheet. The cash will be used to recapitalise Specialty Fashion and support City Chic's growth plans. Management also expect to be able to pay fully franked dividends in the future.
Foolish takeaway
Management has growth plans to grow City Chic's online and international sales. Speciality Fashion is predicting that City Chic's underlying pro-forma EBITDA could nearly double between FY17 and FY18. I can see why WAM (and other investment managers) are interested. It's not the type of investment I'd personally make, but I'm happy to get my exposure through my WAM holdings.
