Thursday, September 11, 2008

The case for The Warehouse without a buyer

The Warehouse Group Ltd [WHS.NZ]has been embroiled in several takeover attempts over the last 18 months or so.

The company has been at the center of bids from Woolworths Australia, Foodstuffs, the New Zealand grocers cooperative and the majority owner and founder of the company, Stephan Tindal.

Of course we all know all this takeover activity is on hold while Woolworths take the battle to The Supreme Court.

In the meantime the capital value of the company has halved and the retail sector, including The Warehouse, has been hit by a recession.

What investors have to ask themselves is, what is the company worth and what are its prospects for the long term if the status quo remains and the company is not merged or bought by a new owner.

Without a doubt, The Warehouse is the major player in the New Zealand retailing sector. It is the largest non food retailer, only Foodstuffs and Woolworths are larger, and it is dominant in most areas of retailing including: clothing, books and CDs, gardening and a whole host of other non grocery items.

The company has an enviable position as a company with great logistic capabilities and "on time' delivery of stock, important in the low margin area in which they operate and their geographical spread across the country, in some of the best malls and stand alone shopping districts, solidifies their logistical capabilities.

The name the Warehouse is also a great brand, well known, backed by frequent advertising and often the first choice for consumers when they think about buying any non grocery item.

A good history of trading also makes the company a good long term prospect in the future.

Interestingly, when you look at the historical trading activity of the company in terms of sales when compared to today and in the light of the current share price the figures are curious.

If I pick a date the earliest I can find, Jan 3 2003, the share price for The Warehouse closed at NZ$7.10 for that day.

Revenues for the full year 2003 (PDF) were slightly over NZ 2 billion dollars, approx 1.5 billion if you strip out Australian sales- the figure relevant for my comparison because The Warehouse OZ no longer exists.

A closing price of just $3.23 on 9 Sep 2008 and the most recent half year sales to January 27 2008 of $852 million (PDF)-estimated $1650 million for full year 2008 show a big drop in share price to sales from 2003 to 2008.

Net profit for full year 2003 was $82.1 million and after-tax earnings for the year ending July 27 2008 are expected to be between $84 million and $88 million, in the toughest retail environment in New Zealand for a generation.

Profit and sales will presumably increase as the retail sector inevitably improves.

The significance then of the difference in what the market puts as the capital value of the company today when compared to 2003 is obvious. It has been unduly marked down, as many listed New Zealand retailers have.

Sales are up and so is profit from 2003 but the market has given up.

Even without the prospect of The Warehouse being bought on the horizon, the capital value of the company is way below that of what it should be, the facts and figure comparisons reflect that.

The fact that 3 different suitors are interested in buying the company means that they can see the value in the company as well. All the advantages that The Warehouse hold in New Zealand retail are the reasons why others want a piece of The Warehouse action.

Long term investors in New Zealand retail stocks would do well to consider buying shares in the Warehouse to capitalise on the current low share price and tough retailing conditions.

In my opinion it will be one of the better performers long-term amongst our listed retailers.

The Warehouse full year result to July 27 2008 is due out 12 September.

Disclosure: I own WHS shares in the Share Investor Portfolio

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