Some one recently asked if anyone has had another look atthe numbers on MWR.
I had another look over the weekend after the UK rollout wasannounced for April.
As I see it, numbers for 2018/2019 are still guess workbecause we had a big jump with the stores buying for Christmas but sales goingforward from this level post Christmas are not easy to guess. Last year sawcompound growth from the March quarter to the Dec quarter but off a lower base. We need to see this year's March qtr sales to get a better grip on full year sales potential.
The margin per watch is not too difficult to estimate bystudying releases to date. I have assumed an extra $270k in staff costs overlast year (might be overdoing it) and an extra $680k over last year’sadvertising costs based on news flow.
We were all disappointed by JB running out of stock forChristmas which has made me drop my estimates for this year and makes it more difficult to estimate real potential (had stores been better stocked). I think it wouldbe reasonable and hopefully conservative enough to assume sales in Australiaand NZ only, to June this year of 20,000 units with over 3,000 of those soldthrough Allmytribe (at a higher margin).
UK has three times our population. If they order 15,000watches between April and the end of June, that takes our total sales up to 35,000units. I allow an extra $800,000 for UK advertising and my estimate on NPAT worksout to $2.7mill. I allowed $1.8mill depreciation/ammortisation so it would be $4.5mill net positive cash flow with only 3 monthscontribution from UK for this financial year. That’s a PE of around 15 on thisyear’s NPAT or a cash flow multiple of only around 9 times. That’s with onlyaround 7 months contribution from JB and Spark and only 3 months contributionfrom the UK. That makes this stock a bargain right now.
By the time of the UK rollout in April in around threemonths, I doubt the market will be focusing on 2018/2019 earnings. The marketwill be looking forward a couple of months to 2019/2020.
We will then see a full year contribution from JB, Spark andthe UK (if not others). Even if we allow only a relatively tame growth in Aus/NZ butfactor in a full 12 months in bricks and mortar, 30,000 units should beconservative enough for even the more pessimistic of posters here. UK has 2.6times Aus/NZ combined. If Aus/NZ is at 30k units, the UK as a fair guess shouldbe at 78k. I'll go conservative and assume UK sells significantly less thanAust/NZ per head at say 60k units for a full year – and I see no good reason to assume that lower level relative to our sales per head.They may in fact sell more. Combined sales would be at least 90k units for nextfinancial year. I add another million dollars again to advertising/staff costs over2019’s increased levels and I arrive at $8mill NPAT or nearly $10mill netpositive cash flow. (As mentioned above, in all cases I assumed $1.8mill writeoff for depreciation/amortisation which adds nearly $2 mill in cashflow aftermy NPAT figure).
That $8mill NPAT would have us on a PE of just 5 for nextyears after tax earnings. That’s for a company in a very high growth sectorwith plenty more European countries to target – i.e. even higher companygrowth potential. This should be trading at a PE of at least 20 times next years expectedearnings. I.e. this should be targeting a share price of around $13. Thatforward PE and sp target could jump further on news of other Europeancountries.
Last year I was surprised at the big correction after JB wasannounced. Then we saw the news that the convertible note facility was beingdrawn on. Once that selling finished we saw a massive move higher in the sp ina very short time (roughly doubled in a month). Now we have seen news again ofanother $500k to be drawn from the convertible note facility. I wonder if thatis again the source of the recent selling (note holders can sell existing stockas the drawing of funds activates their option to buy ordinary stock so theirexposure to upside remains the same and the selling gives them the cash to lendto the company). If this is the reason for the selling, we might see just asbig and just as fast a rally once this latest sell-off is done and ahead of theUK rollout. At some point we might also see news of other European countries tobe added and that will no doubt have a big impact on potential sales growth andthe sp.
My target is now $13. That should be achievable in 6-12 months. Last year I had an intermediate target of at least $5. That was reached after the US markets had begun correcting. Let's see how my new target goes.
Feedback welcome on my assumptions and numbers.
