Pack your thermals

1H23 RESULT

Need To Know

• Margins and cash flow good
• January trading update solid
• Inventory is high but manageable
• Dividend 34cps, but no capital management

The January pre-release of the interim result gave us the bones, but today’s release fills in the blanks of good gross margin performance and continuing sales momentum. Operating costs are rising, and capex is chunky with 18 new stores on the way.

Brands. Divisionally, SUL performed well across the half year with Supercheap Auto sales up 18%, boosted by DIY car maintenance. Rebel sales increased 13% and has continued to trade busily post-Christmas. The new rCX stores are proving a hit with 2 more upgrades on the way to make 15 stores in this format. BCF has been the laggard amongst the group brands as comparable store sales fell 2%, buffeted by discounting by competitors. A new loyalty program for BCF is due later this year. Macpac is still the minnow, but more outbound travel is helping sales growth and a bit a wet weather didn’t hurt either.

Cashflow. Operating cash flow zoomed to $439m due to strong EBITDA cash conversion at 108% and the fact that Boxing Day occurred in 1H23 instead against 2H22 last year.

Inventory. Retailers across Australia have been under scrutiny for the level of inventory being carried as consumers face rising interest rates that will slow spending. SUL’s inventory position is relatively high (Figure 2) but is manageable, in our view.

Costs. The cost of doing business increased 7% in 1H23 and although sales growth was stronger, we think some of the cost increase could be permanent. If sales begin to slow, as we anticipate, cost control will become more important to manage margins.

Investment View

At some point, the consumer spending contraction will begin to impact SUL’s discretionary brands, but current trading says it is not hurting the company yet.

In our view, the modest dividend, which SUL says is weighted to the interim period, suggests SUL is aware a sales slowdown is coming. 

SUL is in a good financial position with no bank debt and $212m on the balance sheet.

Our Hold recommendation feels right as we expect sales growth to slow down this year against a tougher environment for consumers. Revenue is up ~30% since pre-covid, whilst earnings have doubled. A  12mth FWD PER at 12x is close to the long-term average PER multiple of 13x for SUL. 

Figure 1: 1H23 Result

Figure 2: 1H23 Inventory Position