Growth A Gem in Michael Hill’s Crown

Small Caps | Sep 02 2022

This story features MICHAEL HILL INTERNATIONAL LIMITED. For more info SHARE ANALYSIS: MHJ

Despite losing more than 10,000 trading days in the last year, Michael Hill has again delivery strong growth, and looks to pivot from transformation to growth in the coming year.

-Michael Hill delivered a strong year, underpinned by digital marketplace expansion in line with its transformation strategy
-Early momentum evident, with sales in the new year up 18.5% on FY22 and 13.4% on FY21
-Company returns profits with a $20m buyback and 50-75% dividend ratio

By Danielle Austin

Michael Hill International ((MHJ)) has delivered a full year result that has more than satisfied the market, with the fourth quarter marking the twelfth consecutive quarter of positive same-store sales growth.

With the company transitioning from a transformation period to a growth one, Michael Hill looks focused on opportunities to expand its footprint into new geographies and services. The last year has seen the company successfully execute on its marketplace strategy through partnerships with The Iconic in Australia and New Zealand, and The Bay in Canada.

In the coming year, the retailer will look to extend its digital platform in Canada, adding dual-language optionality to capture market share in additional Canadian regions, as well as launching global international shipping. Further, the company continues to develop a digital platform that will allow customers access to bespoke design, sustainability and financial services, that should drive new revenue streams.

The company delivered 7.0% year-on-year revenue growth to $595.2m, 11.1% comparable earnings growth to $62.9m, and 13.9% net profit growth to $46.7m. Underlying earnings did decline -3.6%, attributed to a $2.8m wage subsidy. Michael Hill reported same-store sales growth of 4.2% in Australia, 8.9% in New Zealand and 11.3% in Canada, as well as gross margin improvement of 270 basis points, 140 basis points and 360 basis points in these respective geographies.

Demonstrating strong trading early in the new financial year, Michael Hill has reported sales are up 18.5% on the previous comparable period in the first eight weeks. Analysts have highlighted this early strength has benefitted from cycling off lockdowns in this same period last year, but noted sales are still up 13.4% on FY21 figures. 

The company has also announced a buyback of 5% of its issued shares, which at the current share price represents around $20m. In addition, Michael Hill committed to a 4 cents per share final dividend, which combined with the 3.5 cents per share first half dividend will see the company deliver a total payout of 7.5 cents per share. The total payout represents 67% of net profits, and the company guided to total dividend payouts in the 50-75% range moving forward.

Tougher comparables ahead, digital penetration to drive growth strategy

Of FNArena’s database brokers, two cover Michael Hill. Both Citi and Macquarie are Buy-equivalent rated, and between them have an average target price of $1.67.

Citi (Buy rated and with a target price of $1.48) noted Michael Hill delivered a beat with its full year result, and likes the company’s net cash position at the end of the year which it believes will facilitate acquisition activity and growth initiatives.

Although the broker noted the start to the new financial year has been better than expected, it reiterated its forecast for 7.4% total sales growth in the first half, implying growth will slow to 2.5% for the remaining eighteen weeks of the half as the company cycles tougher comparables. The broker also highlighted that should the Canadian digital platform gain traction from the addition of dual-language optionality, it sees potential for the retailer to launch physical stores in Quebec. The broker lifts its earnings per share forecasts 7-10% in FY23 and FY24, accounting for the company’s strong trading update and revenue growth opportunities.

Macquarie (Outperform rated and with a target price of $1.86) acknowledged the company delivered a solid full year result, and described it as a well-managed company closing in on the end of a transformation period. Macquarie analysts highlighted new region and service expansion would be a focus for the retailer moving forward.

The broker also highlighted ongoing growth of the company’s Brilliance by Michael Hill loyalty program, now with 1.4m members compared to the 800,000 reported in FY21, and that loyalty program members spend close to double what non-members do, with Brilliance members contributing around 76% of total revenue. The analysts described Michael Hill as offering investors an appealing blend of conservatism and growth.

Describing the company’s result as solid given the challenging environment of the last year, Jarden (Buy rated and with a target price of NZ$1.50) also updated on Michael Hill and noted the result demonstrated fundamentals across all key markets were robust.

Jarden revised its earnings per share estimates -1.9%, 5.3% and 15.3% through to FY25, reflecting both near-term earnings caution and lower depreciation. The broker also expects margins will feel the pinch of inflationary pressures, and lowered its earnings forecasts -3.8% and -15% for FY23 and FY24 respectively as a result.

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