Halfords has a compelling, differentiated brand strategy that will help it continue to grow its core Motoring and Cycling market shares. Services remain at the heart of the business and investment in this area is expected to accelerate. With earnings expectations now reset and management outlook understandably cautious, we believe that investor focus will now be on the new CEO’s strategic update in September.
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Halfords Group |
A service-led proposition
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General retail |
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25 May 2018 |
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Halfords has a compelling, differentiated brand strategy that will help it continue to grow its core Motoring and Cycling market shares. Services remain at the heart of the business and investment in this area is expected to accelerate. With earnings expectations now reset and management outlook understandably cautious, we believe that investor focus will now be on the new CEO’s strategic update in September.
Mitigating FX headwinds
Halfords FY18 results delivered 3.7% (2.0% l-f-l) group sales growth and PBT of £71.6m, a 5% decline y-o-y, in line with consensus expectations. Notably, the company substantially offset a c£25m increase in Retail input costs resulting from weaker sterling through supplier negotiations, pricing and operational efficiencies. Retail l-f-ls of +2.3% benefited from the sale of car parts, new tech items, such as dash-cams, and associated fitting services, while lower cycle sales volumes y-o-y, unsurprisingly affected by bad weather, were more than offset by price rises.
Investing in the service-led retail proposition
The arrival in January of new CEO Graham Stapleton, and the upcoming changes of chairman and CFO meant the FY18 results were not the time for a full strategic update. One clear message is that services remain at the heart of the business. During FY18, service-related Retail sales grew by 14.2% and management expects to accelerate investment in staff training, marketing and customer data collection in FY19. Detail on the next stage of growth will be provided in September 2018.
Resetting earnings expectations
Growth prospects for the cycling and motoring markets look upbeat and Halfords appears well positioned to continue taking share from smaller independent competitors. However, management has stated that it expects FY19 PBT to remain broadly flat y-o-y due to FX hedges delaying the benefits from recent sterling appreciation until FY20, lower anticipated bike price rises and accelerated investment in services. This represents a c 5% reduction in FY19 consensus PBT.
Valuation: Shares de-rated, attractive yield
In our opinion the shares appear oversold following the results. Although the detailed strategy is yet to be unveiled, the company has solid foundations with scope to grow market share. It continues to generate strong FCF, supporting an attractive dividend yield. Lease adjusted net debt/EBITDAR remains flat y-o-y at 4x.
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Consensus estimates
Source: Bloomberg |
EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Disclaimer
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Disclaimer
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Research: TMT
EQS’s Q118 report shows performance in line with expectations, with 13% top-line growth and higher investment pushing the group into an EBITDA loss. All is on track for a Q418 launch of the new COCKPIT web-based product platform and our forecasts for FY18e, FY19e and FY20e are unchanged. New KPIs and segmental reporting highlight a strong recurring revenue base and will clarify the growth dynamics of customer numbers and associated revenues. EQS’s markets remain attractive, with corporate obligations become more numerous and complex, underpinning the rating.