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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Warehouse Group Limited / Equity Bottom-Up

<h2>The Warehouse Group</h2>
What’s in Store
The Warehouse Group (WHS) provided updated FY19 earnings guidance implying a ~+7% upgrade on the prior range, as a result of incentive payments that did not accrue. WHS has pre-released its FY19 result — with improved underlying trading pleasing, following a period of considerable strategic change. We look for 1) divisional detail, 2) outlook insight, and 3) targets for its online platform TheMarket when WHS reports on 25 September.
What’s changed?
<ul>
<li>Earnings:&nbsp;Revised FY19 normalised profit +8% to NZ$74m, the midpoint of updated guidance range</li>
</ul>
Earnings upgrade
WHS provided updated FY19 normalised profit guidance of NZ$73m to NZ$75m, ~+$4.5m ahead of the prior guidance range of NZ$67m to NZ$70m. We have accordingly upgraded our FY19 normalised NPAT forecast +8% to NZ$74m. The uplift is not a result of a change to underlying trading but instead removing the impact of incentive payments that did not fully accrue during the period.
Key issues to consider at WHS’ FY19 result
WHS is due to report FY19 earnings on 25 September. Key issues to look for in the result:
<ul>
<li>Transformation progression —&nbsp;WHS is in the midst of a business transformation. Recent operating upgrades suggest initial execution. We look for divisional detail and outlook commentary.</li>
<li>Balance sheet —&nbsp;WHS previously indicated it expects net debt to be in the range of NZ$60m to NZ$80m, a material reduction on the prior period (FY18 NZ$162m), driven by a release of working capital. We understand the release relates to a change in the terms of trade with international suppliers.</li>
<li>TheMarket&nbsp;—&nbsp;WHS recently launched its online platform, TheMarket, in August. We estimate FY19 capex relating to the platform to be ~NZ$8m. Key questions for management include estimated breakeven timeframe, near-term earnings drag, and continued investment requirements.</li>
</ul>
&nbsp;Figure 1. FY19 result expectations
<table class="table table-striped">
<thead>
<tr>
<td></td>
<td>
FY18
</td>
<td>
FY19E
</td>
<td>
% chg
</td>
<td>
Consensus
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
Revenue
</td>
<td>
2,995
</td>
<td>
3,049
</td>
<td>
2%
</td>
<td>
3,066
</td>
</tr>
<tr>
<td>
EBITDA
</td>
<td>
151
</td>
<td>
166
</td>
<td>
10%
</td>
<td>
164
</td>
</tr>
<tr>
<td>
Underlying profit
</td>
<td>
59
</td>
<td>
74
</td>
<td>
25%
</td>
<td>
66
</td>
</tr>
<tr>
<td>
Underlying EPS (cps)
</td>
<td>
17
</td>
<td>
21
</td>
<td>
25%
</td>
<td>
19
</td>
</tr>
<tr>
<td>
Dividend (cps)
</td>
<td>
16
</td>
<td>
16
</td>
<td>
0%
</td>
<td>
15
</td>
</tr>
</tbody>
</table>
Source: Bloomberg, Forsyth Barr analysis&nbsp;
<div class="content-highlight">
Investment View
WHS operates The Warehouse, Warehouse Stationery, Noel Leeming and Torpedo7. Material business transformation is underway which brings considerable moving parts and a wide range of outcomes. This follows underwhelming returns in recent years. We retain a cautious stance with material risk at this stage of the transformation around execution, ‘cost-in’, and time to see results; but there are some initial encouraging signs.
</div>
&nbsp;Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

The Warehouse Group
What’s in Store
The Warehouse Group (WHS) provided updated FY19 earnings guidance implying a ~+7% upgrade on the prior range, as a result of incentive payments that did not accrue. WHS has pre-released its FY19 result — with improved underlying trading pleasing, following a period of considerable strategic change. We look for 1) divisional detail, 2) outlook insight, and 3) targets for its online platform TheMarket when WHS reports on 25 September.
What’s changed?

Earnings:&nbsp;Revised FY19 normalised profit +8% to NZ$74m, the midpoint of updated guidance range

Earnings upgrade
WHS provided updated FY19 normalised profit guidance of NZ$73m to NZ$75m, ~+$4.5m ahead of the prior guidance range of NZ$67m to NZ$70m. We have accordingly upgraded our FY19 normalised NPAT forecast +8% to NZ$74m. The uplift is not a result of a change to underlying trading but instead removing the impact of incentive payments that did not fully accrue during the period.
Key issues to consider at WHS’ FY19 result
WHS is due to report FY19 earnings on 25 September. Key issues to look for in the result:

Transformation progression —&nbsp;WHS is in the midst of a business transformation. Recent operating upgrades suggest initial execution. We look for divisional detail and outlook commentary.
Balance sheet —&nbsp;WHS previously indicated it expects net debt to be in the range of NZ$60m to NZ$80m, a material reduction on the prior period (FY18 NZ$162m), driven by a release of working capital. We understand the release relates to a change in the terms of trade with international suppliers.
TheMarket&nbsp;—&nbsp;WHS recently launched its online platform, TheMarket, in August. We estimate FY19 capex relating to the platform to be ~NZ$8m. Key questions for management include estimated breakeven timeframe, near-term earnings drag, and continued investment requirements.

&nbsp;Figure 1. FY19 result expectations





FY18


FY19E


% chg


Consensus






Revenue


2,995


3,049


2%


3,066




EBITDA


151


166


10%


164




Underlying profit


59


74


25%


66




Underlying EPS (cps)


17


21


25%


19




Dividend (cps)


16


16


0%


15




Source: Bloomberg, Forsyth Barr analysis&nbsp;

Investment View
WHS operates The Warehouse, Warehouse Stationery, Noel Leeming and Torpedo7. Material business transformation is underway which brings considerable moving parts and a wide range of outcomes. This follows underwhelming returns in recent years. We retain a cautious stance with material risk at this stage of the transformation around execution, ‘cost-in’, and time to see results; but there are some initial encouraging signs.

&nbsp;Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Warehouse Group Limited

The Warehouse Group: What’s in Store