Home Company analysis Company analysis: Shriro Holdings Limited (ASX: SHM)

Company analysis: Shriro Holdings Limited (ASX: SHM)

July 4, 2018 , thevaluebaby , 4,566 Comments

The Company

Shiro markets, sells, and distributes kitchen appliances and consumer products mainly throughout Australia and New Zealand. The kitchen appliance business consists of the company-owned brands Omega, Robinhood, Everdure, Neil Perry Kitchen, and the third-party brand Blanco. The consumer products business sells calculators, watches, audio products, coolers, heaters, and air purifiers under the brands of Pioneer, Casio, G-Shock, BABY-G, Edifice, and Omega Altise.

Key Financials

Market capitalisation = $109.4 million

Net operating profit before tax = $21.2 million

Net profit = $14.5 million

Return on average net operating assets = 24.8%

PE ratio = 7.6

Interest coverage ratio = 26.5x

Debt to equity ratio (book value) = 9.6%

Full year dividend payment = $0.11

Value of equity per share = $2.27

Current share price = $1.14

Over/undervalued = 50% undervalued

The Not so Good

As part of their growth initiative, Shriro is currently trying to sell a new line of premium barbeques, Everdure by Heston Blumenthal (see picture below), in Australia, Europe, and the United States. The barbeque market is competitive, especially in the United States…Americans love their barbeque, and they are finicky about barbeque quality. Key word being quality. Alas, SHM’s premium barbeque line appears to have both quality and functional design issues, this coupled with my uncertainty as to how famous Heston Blumenthal is in the United States, leaves me unsure as to how much growth this initiative will deliver.

I would be a lot more optimistic had Shriro partnered with someone more famous…like Gordon Ramsay…’The F Grill’ by Gordon Ramsay – that would sell. Nevertheless, Shriro has partnered with the premium retailer Williams-Sonoma in the USA, so maybe there is some promise here.

Performance in the kitchen appliance segment is tied to residential construction activity, and unfortunately, residential construction is in a bit of a slump and will be for about the next one to two years. This has led to a decline in segment revenues, as of the last market update, about a 11% decline for the February to May period.

Overall, management have flagged a 15% decline in half-year EBIT due to marketing expenses associated with the barbeque line and the aforementioned residential construction slump. Despite this, half-year NPAT is expected to be in line with the previous year due to R&D claims related to the premium barbeque initiative.

My Take

I assumed that earnings will decline by 2% annually over the next three years and then will have perpetual growth of 2%, this resulted in a value of equity per share of $2.27. I think it is unlikely that Shriro will experience high growth despite their expansion initiatives. With a margin of safety of ~50%, a PE ratio of 7.6, and low debt, SHM is firmly in undervalued territory. Residential construction will eventually pick up after the next couple years, and this will be a positive to SHM. Marketing expenses associated with Everdure by Heston barbeques won’t continue at their high levels forever, of course they are high for now as Shriro is trying to penetrate new competitive markets.

In the meantime, SHM currently pays a full year dividend of $0.11, that’s 9.7% of the current share price! Before buying in again, I will await the half year financial report due in the next couple months to get an update on how their premium barbeque growth initiative is progressing.

Disclosure

I was a holder of Shriro from early September 2016 to late January 2018 with an average buy-in price of $1.10. From June 2017 to January 2018, the share price had run to $1.74 from $0.97 and I speculated that it had run ahead of itself. Considering a forecasted flat CY2018 net profit and subdued levels of residential construction, I decided to take my profits. I simply got lucky, and I know that such speculation is not in line with the value discipline. Regardless, Shriro Holdings is now back at an attractive valuation.