Are you sick of hearing that ASX growth shares are now overvalued?
Do you feel like you’ve missed the boat?
One fund manager has picked out a recently floated ASX share that he reckons has outstanding growth potential but is still cheap.
Datt Capital principal Emanuel Datt wrote in a research memo this week that home fragrance retailer Dusk Group Ltd (ASX: DSK) is in an intriguing situation.
“Dusk is the largest player in the local market holding approximately 22% market share, whilst running only around 115 physical stores,” he said.
“The company foresees the potential to grow to around 160 stores throughout Australasia by 2024. Over the last 12 months, the company’s online presence grew significantly making up at least 10% of overall group revenue.”
Datt added that COVID-19 restrictions last year certainly boosted the company’s fortunes, as Australians spent more money on homewares.
“Whilst Dusk was forced to close its physical stores for a short period of time, growth was barely dented with like-for-like sales growth of >17% for FY2020.”
Dusk’s case for growth
Despite the prospect of coronavirus vaccines liberating Australians from the confines of their homes, Datt still sees expansion opportunities.
“Dusk intends to penetrate its core Australian market fully and [start] to roll out its stores in New Zealand,” he wrote.
“It aims to grow outside the ANZ region by establishing online stores in key geographies.”
The fragrance retailer doesn’t currently sell to the United States and United Kingdom, but it still sees “a significant” 1% of web traffic from those locations.
“We would expect that Dusk may one day have larger international operations than domestic. The company intends to begin international order fulfilment and to test demand in overseas markets starting from FY2022.”
WAM Microcap Ltd (ASX: WMI) last month agreed with Datt, naming Dusk as an ASX share it held and had great hopes for.
How are Dusk shares cheap?
Datt uses the ‘enterprise value to EBIT’ ratio to support its claim that Dusk shares are considerably cheaper than other discretionary retail businesses:
|ASX-listed discretionary retail businesses|
|ASX share||Enterprise value||EBIT||Ratio|
|Premier Investments Limited (ASX: PMV)||$3.4bn||$233m||14.7|
|Baby Bunting Group Ltd (ASX: BBN)||$628m||$33m||19|
|Lovisa Holdings Ltd (ASX: LOV)||$1.16bn||$30.6m||37.9|
|City Chic Collective Ltd (ASX: CCX)||$850m||$22m||38.6|
|Nick Scali Limited (ASX: NCK)||$860m||$88m||9.8|
|Kathmandu Holdings Ltd (ASX: KMD)||$855m||$56m||15.3|
|Accent Group Ltd (ASX: AX1)||$1.26bn||$136m||9.3|
|Adairs Ltd (ASX: ADH)||$665m||$82m||8.1|
|Figures sourced from guidance and actual results
Source: Datt Capital. Table created by author
“If we assume as a conservative measure that Dusk can achieve the lowest valuation multiple out of its peers at 8.1x, we could expect to see the company trade at an enterprise value of $267 million or $4.24 per share (84% more than the current price),” he said.
“Note that this figure excludes the company’s existing significant cash balance. No matter which way we examine the company, it still trades cheaply by any metric.”
Dusk reminds Datt of jewellery retailer Lovisa, which was also once owned by private equity firm BBRC.
“Lovisa listed at a market value of around $200 million. It is now valued at around $1.2 billion with normalised EBIT of around $30 million,” he said.
“This company itself, we consider having lower growth potential than Dusk at this point given the product range and current geographic spread.”
What’s the downside?
The investor memo from Datt speculates that the Dusk IPO was “a sell-down” by the private owners rather than a genuine capital raising.
“It would not have made sense for Dusk to raise fresh capital considering the company was strongly capitalised at the time of the IPO,” Datt said.
“Accordingly, the IPO allowed the two largest holders, Catalyst and BBRC, to reduce their shareholding in the group.”
The analyst wasn’t too concerned though, as private equity firms like Catalyst need to have an exit strategy to realise gains for their investors.
The other uncertainty, of course, is the pandemic.
“Our thesis is that people are spending more on themselves and their home environment in lieu of travelling overseas and interstate,” said Datt.
“Whilst we cannot say with certainty when travel will become commonplace, we expect this time of restricted physical movement to last at least another 12 months.”