‘Attractive’ ASX share with 60% upside and 6% dividend yield

This candle and fragrance retailer will be both a COVID and recovery beneficiary, according to one expert who reckons it’s a growth share dressed like value

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There is one ASX growth stock that’s so cheap like a value share that one expert reckons it has 60% upside from its current price.

Datt Capital principal Emanuel Datt said back in February that candle retailer Dusk Group Ltd (ASX: DSK) was a sensational bargain.

Even though the shares have risen more than 25% since then, he reiterated on his blog this week that the stock is still outstanding value. The shares were going for $3.07 at the close of Thursday trade.

“We consider the fair value for Dusk to be around $5 a share,” Datt said. “We believe that Dusk looks highly attractive at the current valuation.”

Upgrade-a-thon

Dusk floated on the ASX in November with an initial public offer price of $2.

Although the stock is now more than 50% up from the issue price, Datt is certain it has been ignored by most investors.

“[Dusk] has flown under the radar of many investors. Since listing, Dusk has delivered 3 consecutive earnings upgrades.”

The chain is the largest in the Australian market, according to Datt, commanding about 22% through 122 physical stores. He said the company can potentially grow to 160 outlets by 2024.

Datt is also a big fan of the nature of the goods sold.

“The products are orientated towards making homes and offices pleasant environments, which has become exceptionally important given the recent lockdowns,” he said.

“In addition, the majority of the company’s products are consumables or products that use consumables. This means that every sale in the present has a high probability of further follow-on sales in the future.”

Dusk’s peer valuation and overseas plans look favourable

Once COVID vaccinations rise and international travel opens up, the retail chain has plans to grow its network overseas.

Datt noted back in February that Dusk doesn’t sell to US and UK customers, but still receives “a significant” 1% of its web traffic from those markets.

Dusk shares look cheap compared to other smaller-cap online lifestyle retailers listed on the ASX.

Price-to-earnings before interest and tax (EBIT) is the metric favoured by Datt to come to this conclusion.

He said that Dusk shares are currently priced at 5 times EBIT, while peers like Adore Beauty Group Ltd (ASX: ABY) and Lovisa Holdings Ltd (ASX: LOV) are on 78 and 49 respectively.

Datt admitted the Delta strain of COVID-19 strangling much of Australia will have a negative impact on the 2022 financial year.

“While like-for-like growth sales are down slightly, we anticipate that Dusk may be able to achieve at least 80% of FY21’s revenue, while maintaining an EBIT above $30 million,” he said.

“This assumes that social restrictions are loosened in Victoria and NSW prior to the Christmas shopping period, as well as being open during the key Mother’s Day trading period.”

Icing on the cake

A nice bonus for Dusk shareholders is that while the business is focused on growth, it’s already giving out some dividends.

In March, the retailer gave out a fully franked 15 cents per share, giving it a 5.2% yield or 6.4% grossed up.

That was just an interim dividend, so Datt assumes a similar final dividend later this year will make it a bonanza for investors.

“We expect the company to continue to pay a sustainable, reliable dividend stream in the coming years, while holding significant upside potential from further expansion in its activities.”

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Motley Fool contributor Tony Yoo owns shares of Dusk Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Adore Beauty Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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