Stock spotlights

August 24, 2018

 

CML Group (ASX:CGR)

 

One of our favourite stocks, it produced a fine profit result for FY18 and promises more over the next two years from a combination of winning market share, expanding into new segments of the market and innovative technology. It has proven it can move outside the comfort zone of its dominant invoice factoring operation by producing a profit in equipment financing just a year after starting the business.

 

Now the CEO, Daniel Riley, is venturing into new growth arenas.

 

First, he is launching an App next week which will give the company the look of a fintech. The App will enable the automatic collection of data involved in a new business submission, replacing the manual processes that take hours to perform. It also will be an easier introduction for customers who are turned off by the existing online enquiries platform. It is hoped the simplicity and speed will help CML win share from its external broker network. Humans love simplicity.

 

Second, the company has hired new people capable of entering it into the larger part of the factoring market, confidential invoice and trade finance. All of CML’s existing factoring is open … in other words debtors are aware that a factoring agent is collecting on behalf of its client. It is suited to companies that already have a competent accounts department with debt collection capabilities. CML will start out cautiously. Not only will this open up a large new market (90% of the market, currently dominated by Westpac and Scottish Pacific), it will add to the business its friendly external brokers can send its way. It’s a relatively small investment that leverages off its existing infrastructure and could return a big prize.

 

Daniel is confident the traditional factoring business will continue to grow strongly. After posting a 33% increase in invoices and EBITDA (helped by the acquisition of Thorn Group) he reckons July did another 17% of organic growth. Add to that probable further growth in the equipment finance division and CML offers plenty of prongs for growth.

 

Lovisa (ASX:LOV)

 

Sometimes you have to take risks to make money and sometimes you don’t. With Lovisa there is a bit of both.  

 

LOV is busy rolling out its modularised latest-trend affordable jewellery stores in various parts of the world, particularly full speed in the UK, and is piloting stores in three new market of size; France, Spain and California in the US.

 

It produced a strong FY18 result, revenue up 21% and NPAT up 24% on the back of 6.8% positive organic sales.  It has produced multiple strong double-digit profit growth years consecutively.

 

There are a couple of risks. One is that the stock is not cheap for a traditional retailer, trading on a forward PER of around 25x. Second is that this is a roll-out story and whilst the company is in a number of countries it is greatly relying on one, the UK, for most of its new-store growth at the moment. That’s not to say Australia and the other locations aren’t performing, just that they have a higher proportion of growth coming from organic like-for-like sales.

 

Third is the fact that the market is putting high expectations on the pilot programs. The company doesn’t indulge the market with any facts on these programs and will only let us know what is likely when they commit to any or all of the regions. If any or all of these do not proceed the market will be disappointed. It doesn’t mean growth will not continue, it just means expectations have been let down. More of a psychological effect in the short term.

 

Given the company has decided to increase the store count in each of these locations to seven by Christmas the certainty of each going ahead is pretty good (currently Spain 5, France 2 and USA 1). The UK was committed after running five to seven stores over a time period.

 

Where we ultimately don’t think there is much risk is in the layering effect of all of this.

 

The company runs a simple modular model of store fit-outs globally and a cookie cutter design and production line on the back of latest fashion trends which lends itself to scaled leverage.

 

And, while we may see fluctuations in market growth and margin behaviour at different times and in different locations, over time the dollar margin will keep on growing. If just one pilot is given the go-ahead the company will indicate a target number of stores it will add and that roll-out will then layer on top of the UK roll-out. If another is announced it will further add to that layering, and so on. Meanwhile the company can start new pilots once these commitments are made.

 

It adds up to broader and longer sales certainty. That is a good thing in retail. Market consensus forecasts are for strong double-digit earnings per share growth out to FY21. We like it.

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