A Quick Look At The HLG Finances

A few glance at the half year interim report look to me as though HLG is a really solid retailer. Margins are good but competitive, they invest profits into new stores and pay what’s left to investors as dividends, holding a sensible amount of cash in the bank entering the next period.

A recent announcement stated that they are suspending future dividend payments due to the Coronavirus and will assess the situation at the end of the year.

It seems impossible to know whether HLG will need to do a Capital Raise (CR) because HLG have not announced if any arrangements have been made with landlords to reduce rent during the lockdown, I don’t know staff costs, or how long the lockdown will last.

We can see from the Wage Subsidy Employer Search that HLG have claimed about $5.2m over about 6 weeks, of which at least 80% must be paid to staff.

If we extrapolate that out, it looks like staffing costs for half a year would be about $22.5m of the $67m selling and administration expenses listed on the half year report (which is where I guess staff costs are).

This leaves $44.5m for rent and other things. Let’s randomly (because i can’t see any way of knowing) assume that $40m is the cost of rent for the first 6 months.

Optimistically, let’s assume that leasing costs have halved, as I’ve anecdotally heard that shopping mall land lords are shouldering half the burdon during the lockdown, in order to ensure business continuity.

If we add $4.5m (the 20% of the wage subsidy that HLG are allowed to keep) to the $12.8m cash and equivalents stated as owned at the end of the last period, that gives HLG $17.3m to spend on rent, which may be $20m.

Therefore it seems to me as though a CR or some debt facility is possibly not required, based on the above assumptions, but depending on how long the lockdown lasts, they may need to finance working capital.

Therefore, as the lockdown continues, we may see the value proposition of HLG shares decrease.

What are HLG shares worth right now?

It seems that profits will be somewhere in the region of low to negative by the end of the coming year, but it would be stupid to value HLG based on this because the forward potential of the following years is great. Therefore I will base my valuation of HLG on how I expect profits to be in 1-2 years time, minus the expected rate of return during those years.

Let’s assume that the lockdown will be on-and-off for the remainder of the calendar year and HLG will scrape by with near zero profits and no debt to work off. Hmmm… it’s hard to imagine if that could go on for another 6 months after that, or if we’ll be done with it by then… and by done with it, I mean that either there will be a vaccine or it will turn out that hospitals can handle the load and/or people lose interest in the virus and accept living with it.

In order to do a valuation on HLG, I need to be able to accurately predict the length of time the lockdown is in place, sentiment about the virus, and consumer sentiment post “apocalypse”. This is starting to look like gambling; the gamble being that I could get no return for a couple of years, or a double digit return in a year or two based on today’s slightly lofty share price.

Consequently I will assume pessimistically that the virus will cause an on-again-off-again lockdown over the next 12-18 months, during which time HLG’s profits will go from zero to low as consumers are able to buy, but commerce is sedentary due to virus fear.

My prediction is that within 6 months, governments will be funding the production of antibodies (not a vaccine) that will reduce the threat of the virus and enable hospitals to cope will the demand. I believe that governments will then distribute propaganda to reduce consumer fear, so they can stoke the economy and recover money for the treasury. A first iteration of the vaccine will follow 6-12 months from there.

Lewis Hurst

So if profits are similar in 2 years time, compared to the way they have been in the last year, in 2 years time I expect the share price to be similar to what is is now (about $4.00) to give investors a high single digit percentage dividend return. The valuation based on “high single digit dividend return” is founded on historic pricing. Also because as an aspect of my portfolio, I’d be happy with a high single digit percentage return on a stable company, as a “sure thing”.

If the price is $4.00 in two years, I want 20% ROI per year to get there. That’s made up of the 8% I wanted plus a risk premium of 12% (which includes my opportunity cost against other growth shares). This places the current value at about $3.00.

If we are generous and say that we’re happy to take 8% for 2 years growth, that would place the value at $3.40.

At most, a sane optimist would see value at $3.70, based on everything being fine next year and a forward PE of today’s value minus the 8% ROI in the price (because it’s not coming out of the dividend this year).

Therefore I see no value to be had in the current share price of HLG.

It’s important to try to understand why the price is what it is when your valuation disagrees with the market, to ensure that you’ve not missed something. So I don’t say this with any malice towards anyone, but I can only assume that the current price is being propped up by novice retail investors looking at this from a purely PE perspective based on the backwards PE stated on the NZX website, a dividend trap (having not read the recent announcement cancelling future dividends until further notice), a comparative reduction from former highs being misconstrued as a bargain, or because they like the company.

Addendum: Now that I’ve had a day to think about it, it could be that some investors assume that the country is done with lockdowns, now that we are moving into Level 2 and shops are potentially going to be reopening next week. Perhaps investors are expecting packed shops taking a month’s worth of revenues, like we have had with takeout food? Personally, I don’t think this will be such a factor. People aren’t desperate to cram into places like shopping centers, packed with other people, due to Coronavirus concerns. Also the lockdown has been depressing people, which increases propensity to eat junk food. Im not expecting the same demand for retail therapy.


Hallenstein Glassons Holdings Limited (NZX:HLG)

Hallenstein Glasson Holdings Limited is a retailer of menswear and womenswear, listed on the New Zealand Stock Exchange. The company operates in excess of 120 stores, with 35 stores in Australia.

More information about Hallenstein Glassons Holdings Limited…