Baby Bunting Group Ltd (ASX:BBN)
Last month we purchased shares in Baby Bunting (BBN) following a sharp fall in its share price. The baby goods retailer updated the market on its half-yearly results, reporting lower-than-expected earnings in the first half.
We like BBN for the following reasons:
1. It currently trades at an attractive relative and absolute valuation. At its current share price of $2.70, BBN trades on an FY24 sales multiple of ~0.6x, a P/E of 14-16x (our estimate) and an implied value of $4.8m per store. This is cheap compared to its historical average of 1.1x sales, ~30x earnings and $7.6m per store.
2. It has a long runway of sustained and robust earnings growth. We expect BBN’s earnings to grow organically at double-digits over the next decade, aided by new store rollouts, a maturing store network and margin expansion.
BBN's earnings should be materially higher over the next several years, driven by a doubling of its store network. This has a two-pronged effect on earnings. Firstly, new store openings are accretive to earnings. A mature store generates ~$8m in revenue and earns ~20% EBITDA margins. It typically takes a new store around five years to reach maturity. Secondly, as the size of BBN's store portfolio grows and becomes more mature, the company should benefit from economies of scale, causing margins to expand over time. This should result in earnings growth outpacing revenue growth.
Smartgroup Corporation Ltd (ASX:SIQ)
Towards the end of last year, we added Smartgroup (ASX: SIQ) to our holdings, with our average price being around $4.60. Smartgroup provides employee management services in the form of salary packaging, remuneration solutions, fleet management and workforce optimisation.
At the time of purchase, the business was trading on a P/E of ~10x. With stable, consistent cash flows, a history of revenue growth and margin expansion, the business has generally sold for nearly twice that multiple. In addition, the demand for novated leasing (significant source of revenue) often increases with rate rises, as the cost of borrowing makes purchasing vehicles outright less desirable. Finally, a large portion of SIQ’s employee customers are within the healthcare space, and this sector will undoubtedly grow over time.
