The Dusk Group Ltd (ASX: DSK) share price has dropped heavily in 2022 — it's down almost 50%.
Investors should certainly take the potential impacts of inflation and higher interest rates into account. But I believe the Dusk share price has fallen too far and could be an opportunity.
If you haven't heard of Dusk before, let me outline what it does.
Dusk describes itself as a specialty retailer of home fragrance products. It offers a range of Dusk-branded "quality products at competitive prices" from its physical stores and online store.
The company claims to be Australia's leading home fragrance, omni-channel retailer.
Some of the things it sells include candles, ultrasonic diffusers, reed diffusers, and essential oils, as well as fragrance-related homewares.
What's attractive about the Dusk share price?
For starters, Dusk shares are now a lot cheaper than they were before. A 50% drop is very large. Is its current and future value really worth 50% less than it was at the start of the year?
Using the estimates on CMC, the business is projected to generate earnings per share (EPS) of 27 cents in FY22 (which has nearly finished), 19.7 cents in FY23, and 22.4 cents in FY24.
That means it's valued at less than seven times FY22 estimated earnings, less than nine times FY23 estimated earnings, and less than eight times FY23 estimated earnings.
A low price/earnings (P/E) ratio doesn't automatically mean great value. But I think when combined with some of the other things I'm going to write about, it will explain why I see Dusk as attractive.
The company's cash level is an important part of the valuation, in my opinion.
According to the ASX, Dusk has a market capitalisation of $107 million. At the end of the FY22 first half, it had $33.3 million of net cash. So, almost a third of the Dusk valuation is backed by cash. The P/E looks even cheaper when taking the cash into account.
What is Dusk doing to grow its earnings?
While sales may move up and down over shorter-term periods, I think the company is doing the right things to try to grow earnings in the future, which will hopefully help the Dusk share price.
For example, it's growing its store network. At HY22, it finished with 128 stores, which was an increase of six stores.
It's also trying to grow its Dusk rewards active members, who pay to join. These members generated 62% of total company sales in the FY22 first half.
Online sales continue to grow, which could be important to connect with customers as more shopping is done online.
In the first eight weeks of the second half of FY22, online sales were up 19.4% year over year. They were also up 121.8% over a two-year period.
Dividends of 12.5% for FY23 and 14.4% for FY24
The Dusk share price is cheap in relation to its earnings. That means any dividends paid come at a higher dividend yield right now.
CMC forecasts a dividend per share of 15.2 cents in FY23 and 17.6 cents in FY24.
With Dusk's dividend being fully franked, that translates into forward grossed-up dividend yields of 12.5% in FY23 and 14.4% in FY24.
Foolish takeaway
I'm not suggesting that Dusk is an extremely high-quality business, or that it will be very resilient during an economic downturn – it's already seeing sales decline in FY22.
But I think it's now so cheap that it looks good value for the long term if it continues to grow its store network, pay big dividends, and increase online sales.
