Takko - hedging by half a lockdown
All,
Please refer to our unchanged analysis here.
Volume assumptions have been spot on, but apparently, there was less aggressive discounting required to achieve it. Stock, therefore, remains as elevated as anticipated, but while restrictions were in place the company clearly made more money on the stock it sold. As a result, deferrals are E10m better and cash is E20m better.
Overall it’s an astonishingly resilient* operating performance.
Implications:
- E20m more cash.
- We will raise our Gross Margin assumptions for the remainder of the year and from Q3 onwards operate with more normal volumes instead. We had previously assumed an aggressive discounting strategy to move the stock, but at least so far that is not visible from Q1 results. Regardless, the effect should be a better overall Gross Profit and better cash production in the year than we had in our model.
Management Outlook:
- Management give a guarded outlook, aiming to exceed 2020 only slightly, even though Q1 is on par with 2020, Q2 should see a slightly bigger lockdown impact than last year and there are currently no further lockdowns scheduled. I.e. Management are hedging their comments by approx. half a lockdown.
- Trading since reopening of the stores seems to have been encouraging and beyond management’s expectations. “The reopened stores show higher net revenue than expected” leading management to conclude that future revenues and margins will exceed those of 2019. But not yet.
Q1:
- Price: Volumes were some 5% better than we anticipated, but the big outperformance was on price. We had assumed the company would have to discount heavily to move this volume when apparently it did not have to at all. The GP of over 60% is healthy for Takko standards - Q1 is usually strong with an average of 62%-63%. Last year already (Q1 runs from Feb to April) Takko achieved a relatively healthy 60.5% margin, even though Covid 19 lock-downs closed the stores halfway through that quarter. This time round increased freight costs and 10% inventory write-offs (lower than we thought) weighed on performance. The company contends it would have made 63% GP otherwise.
- Adj. EBITDA of -R24m, therefore, was E15m better than model, despite a reversal in capital reserves relating to the share-based compensation program, some XO items and restructuring fees. However, in total it seems that Takko have not been able to use the furlough scheme as extensively as we thought.
- WC estimates were spot on. Inventory remained elevated by some E65m - as modelled.
- Incremental deferral of payables was E10m lower than we expected, i.e. Takko paid down E10m more than we had assumed.
- CapEx was near zero - naturally.
- Cash - The cash position of E75m is, therefore, E20m better than model and reasonably comfortable.
Positioning:
We have bought back our short position following the Q4 announcement and given the much stronger than expected gross margin in this market, we may even move to contemplating a long position in the name - as tight as it is. Bonds so far seem to have moved up only a few points to 93 offer.
Happy to discuss,
*Market’s most overused word since 2020, but it actually applies here...
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003