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SHM – Shriro Holdings Ltd

LT Buy, ST Buy: Target Price $2.47

Shriro Holdings Ltd (Shriro) is a consumer product company who is sales channel agnostic; be it physical or digital. The Australian retail industry is on the cusp of a new era with Amazon tipped to enter the market for the 2017 Christmas season.

Amazon will have a significant impact on the consumer landscape for which I see 3 major headwinds for incumbent retailers:

  1. Amazon will take share from bricks and mortar retailers. Within their verticals the global giant accounts for around 50% of online sales in the USA. Some analysts think Amazon can achieve 20% Australian market share over 3-5 years.
  2. Amazon will drive price discovery being the cheapest due to their procurement scale and global relationships. Amazon has a significant balance sheet and has a history of using price to take share. Amazon shareholders are comfortable for the company to lose billions of dollars if revenue and market share opportunities present.
  3. Amazon is changing the behaviour of consumers. Innovations such as Amazon Prime (unlimited delivery for $US 99 pa) and Echo (a smart home device) lock in customers to the Amazon channel and bypass traditional channels.

These issues will present significant earnings headwinds for the major Australian retailers given their long-dated leases and high fixed cost base. Any loss of market share will result in a significant loss of earnings due to their operational leverage and should result in a share price de-rating. In contrast Shriro will use Amazon as another sales channel broadening the company’s reach and lifting sales over time.

In addition to a stable and growing domestic product base, Shriro is well advanced on the global launch of its Everdure by Heston BBQ range. This provides a large global growth option as further upside to an already solid consumer product company.

The company started trading in 1982 and listed in 2015 and is not widely covered by the market.

Company overview

Kitchen Appliances

Shriro’s kitchen appliances brands cover a wide range of market segments and positions themselves in all categories below the luxury end.  The business captures demand arising from new detached housing, renovation and replacement markets. There is some small demand arising from new apartment builds, so the eventual supply slowdown will not be a major issue.

The Kitchen Appliances division contains the following brands:

  • Neil Perry Kitchens by Omega – upper middle product category aiming to bring commercial kitchen application to the home

o    Sold in Harvey Norman

  • Omega – middle product category for kitchen appliances

o    Sold through retailers such as Good Guys and appliances online

  • Robin Hood – middle product category for kitchen accessory appliances

o    Sold through retailers such as Good Guys and appliances online

  • Blanco – Affordable quality kitchen appliances

o    Sold through retailers such as Bunnings and appliances online

Shriro outsources its manufacturing to China and retains the IP by owning the tooling. Inventory is made to order reducing the risk of excess inventory in the system.

Consumer Products

Shriro’s consumer products division includes a wide range of consumer discretionary products. Products range everyday needed items to more aspirational products.

The Consumer Products division contains the following brands:

  • Everdure by Heston – Aspirational but reasonably priced BBQs

o    Sold through retailers such as David Jones and appliances online

o    Global launch underway with major retails identified in USA, UK and Germany

  • Everdure – heaters and BBQs

o    Sold through retailers such as Bing Lee

  • Casio – exclusive rights to Australia and New Zealand on a continual agreement basis (35 years to date)

o    Casio Watches, G-Shock, Baby-G

o    Casio Calculators – 90% market share as recommended by the department of education

o    Casio Music & other

  • Edifice Watches – sports watches

Shriro is paid at the point of a retailer’s order, removing credit and inventory risk.

Risk Assessment

Company Quality Assessment: High at 9.9 (out of 15)

Shriro’s is a high-quality business who’s mix of products provides diversification. The group has some exposure to consumer demand however most of their products are essential with eventual replacement required over time. The company has shown solid innovation by differentiating their products and positioning well for each market segment. The business is likely to grow at similar levels to the economy with the addition of a free growth option from Heston by Everdure success. Brand ambassadors are paid on a commission basis and are incentivised to drive sales. I see Amazon’s entry in to the domestic market as an opportunity for Shriro.

Liquidity Risk Assessment: Very High

SHM is a micro-cap company with current market cap of $136m. Liquidity in the stock is tight given directors and management account for over 35% of the company.

Potential Risks

  • Upside:

o    Domestic and Global success of Heston by Everdure BBQs

o    New Casio global product launch (Nov 2017) for CY18 product release in Australia

o    Continued robust domestic housing market

  • Downside:

o    Souring of Casio relationship / loss of Casio (although unlikely given long history)

o    Lack of innovation from Casio to compete against smart watches

o    Economic downturn reducing consumer or housing demand

o    Loss of reputation by brand ambassadors

o    Director / Management share sell down

Return Assessment

The 12 mth target price for the base business is $2.47

  • This assumes GDP type revenue growth and continued efficient cost management
  • Continued above 25% Return on Invested Capital
  • Excludes upside from Heston by Everdure

This implies capital upside of 74% on CY18 earnings numbers

Dividends are forecast to be $0.11 (fully franked) in CY17 fully franked which equates to a 7.6% net dividend yield (10.9% gross yield) at current levels. An investment in Shriro is paid to wait for the success new product releases.

Management and Board

Independent Chairman – John Ingram, chairman since Apr 2015, current chairman of Nick Scali (NCK-AU)

Independent Director – Greg Laurie, director since Apr 2015, director of Nick Scali (NCK-AU)

Non-Independent Director – Vasco Fung, director since Apr 2015, major shareholder (32%)

Non-Independent Managing Director – Mike Westrup since Apr 2015, CEO since 1995

2 Independents, 2 Non-Independent

It is noted that the board is not majority independent, however, the independent chairman has the casting vote. The board has diverse experience including solid retail and outsourcing of manufacturing expertise.

CEO Mike Westrup has announced his intention to retire. He has done an excellent job of delivering high returns on capital for shareholders by positioning products driving innovation.

Incoming CEO Tim Hargreaves has led the Casio division with success. I see his appoint to the CEO role as key to retain the ongoing relationship with Casio.

CFO Shane Booth has a sound grasp of the drivers of the business and numbers.

For more detailed analysis email or call us.

Kimber Capital Contact:

Chris Kimber

Managing Director

E: chris@kimbercapital.com

M: +61 418 229 631

D: 02 9900 9201

 

Kim Slater

Portfolio Manager

E: kim@kimbercapital.com

M: +61 402 019 047

D: 02 9900 9200

 

Daniel Cuthbertson

Head of Research

E: daniel@kimbercapital.com

M: +61 421 322 155

D: 02 9900 9203

 

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