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Shriro – paying you to wait

August is the month for civil uprisings, European beach holidays, and confessions, at home, of corporate half year reporting season.

Alexander Dubček led the 1968 Prague Spring uprising, instigating liberal reforms or “socialism with a human face.”  And history students know that ended badly.  South of France attracts more beachgoers than Bondi does on a stinking hot Australia Day. Or as old mate would say, more swimmers than blowflies around a Billy goats bum.

Like Prague residents who switched all the road and traffic signs to confuse Soviet tanks, I momentarily wondered whether the August half year Shriro Holdings profit announcement was a misleading cul-de-sac turn or simply a slow sign for roadworks ahead.

Shriro we have written about before. It is a consumer distribution business, best known for the Everdure by Heston charcoal BBQ range and Casio watches and products. Using its technological innovation, Shriro has been exporting the Heston range of BBQ’s to the world. The big market to crack is the USA. BBQ cooking and smoking is big business there – sales of BBQ’s are estimated at around $2 billion annually.  Globally the figure is much higher.

All has been going to plan. The company has won prestigious USA trade awards and distributors and retailers are stocking Heston’s range following a recent west to east coast product range. Any new product takes time to get market acceptance. Retailers need to place orders for the next upcoming BBQ season, which kicks off every July Independence day weekend. Some larger orders have naturally been slow in forthcoming, as the Everdure range builds market presence. Overall first half CY 18 BBQ sales were up 58% on previous to $6.5 million, compared to full year CY 17 of just under $9 million.

And the SHM board was concerned market analysts were running with NPAT (Net Profit After Tax) of $13 million for FY 18 –ahead of where they thought the full year figures may be.  And a timing delay of USA orders could impact those analyst’s estimates.

The SHM board has forecast FY 18 NPAT at between $10.5 -$11.5 million. But adding back abnormal expenses items of $1.3 million including $700,000 for the USA Everdure by Heston launch, changes the NPAT picture.  The revised range could be $11.5-$12.5 million. Which is only a small coo-ee from analyst’s expectations.

Kitchen appliances underperforming in the first half was slightly of more concern. Sales fell 11.5% to $37 million. Retailers like Harvey Norman put the screws on suppliers. And Shriro was no exception.  Housing starts for both detached homes and apartments are patchy on Australia’s East Coast. Offsetting this is the renovation market, which lags the new housing cycle, but which the HIA   estimates at $30 billion a year. Shriro is clearing the old Omega appliances range. These run out sales have contributed to lower appliance margins ahead of a new range of updated Omega appliances over the next few months.  

Stock inventory has risen from $39 million to just over $46 million to reflect the investment in the new Omega range and longer manufacturing lead times associated with a new product revamps. Management expects the inventory levels to normalize in the second half, as appliance stockists order the new range.  The balance sheet is still strong with net assets of $54 million and no intangibles like goodwill to impair.

Most importantly Shriro has maintained its interim dividend at 4 cents a share. And management, on its recent investor roadshow was suggesting this year’s annual div, subject to board approval, would be in the vicinity of 10 cents. Implying a final dividend of at least 6 cents. The stock is trading on a 9.5% fully franked dividend yield at the current price of $1.05. And the price earning multiple at just over 9 times is below small cap averages.

So, what I think Shriro has going for it is continued global expansion of BBQ sales; a pick-up in home renovations and appliance sales – although there may be a timing lag, and continued new product development.

Possibly the most exciting new product development is the launch of the Everdure by Heston, 4k combined smoker and charcoal BBQ. This has been developed specifically for the USA market and will probably be released there early next year. The 4k Australian release is expected in the next two months.

Continued expansion into global markets over the next few years lessens the impact appliances will have going forward.  BBQ sales will grow to be a significant part of earnings and I think in FY 19 and FY 20 as these sales expand, Shriro could book upwards of a 20 % increase in NPAT. If the company maintains current dividend payout this suggest annual dividends could be around 14 cents a share. And a share price based on current P/E of at least $1.60. It has been there before.

As one seasoned corporate investor said to me – the current dividend pays you to wait while the company delivers on growth.  

Kim Slater

Take the time to read the recent investor presentation: 

https://webbackend.shriro.com.au/images/upload/files/ip43x6hjx707pkp1.pdf

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