Adairs (ADH) has concluded its IPO and successfully listed on the ASX at 12pm today. ADH opened at $2.67, 11% higher than its IPO price.
Fortunes of Australia’s retailing industry are closely linked to the cost of money within the economy. For the past three decades, sales growth rates within the retailing sector have fluctuated in reasonable proximity to the Reserve Bank’s cash target rate. At any given time, the ratio of retail sales growth stands between half to two times the cash rate. Whilst ratio’s toward the upper end of this range have historically preceded a period of interest rate tightening by the RBA, the industry has been granted reprieve during 2015.
Despite retail sales expanding at twice the benchmark interest rate during 2014, the RBA has extended a loosening cycle which commenced during 2011, cutting interest rates twice so far this year. The rate cuts have been a boon for household goods vendors, which have witnessed sales growth rates double the retail industry’s average to date in 2015.
The coming listing of home furnishings retailer, Adairs offers investors exposure to the trend. The Company specialises in manchester, homewares and other soft furnishings. Its principal assets include a 131 national retail store network; vertically integrated product design, development, sourcing, and distribution supply chain; and customer loyalty program with 373,000 members. Adairs retail origins span back to 1918.
With Adairs’s listing representing a sell down by existing shareholders, incentive for new investors is provided by its record of profitable growth. Adairs is on course to generate its fourth consecutive year of higher sales and earnings during FY16. Market share gains and margin improvements have potential to sustain the trend. Adairs is currently targeting 8 to 12 net new store openings in Australia each year for the next five years and has completed Scoping Studies into New Zealand and South Africa expansion opportunities. Planned supply chain investments totalling $2.3million could also generate cost savings.
Primary risks surrounding the float include Adairs’ vulnerability to changes in consumer discretionary spending, and execution of its expansion plans. With recent growth resulting from cost based margin improvements, sustaining recent trends appear contingent on the Company’s ability to expand market share. Over the past decade, operators like Adairs have benefited at the expense of department stores, which have seen their share of retail expenditure decline from over 8cents in the dollar to current levels of 6cents. Should the consumer cycle remain favourable and Adair’s retain a competitive edge, the outlook generally favours a mix of income and modest capital growth.
Company: Adairs Ltd
ASX Code: ADH
Shares on Offer: 90.9m
Listing Price: $2.40
Market Capitalisation: $398.1million
Listing Date: June 17th
Author: Tim Morris
Jun 17, 2015
Having studied Commerce and Science at the University of New South Wales, Tim began his career in an analytical capacity with Wise-owl. Tim has conducted over 500 corporate valuations and appraisals, specialising in pre revenue assets and emerging markets. For the last five years, his Equity Capital Market insights have been featured as part of a weekly column in The Australian and regularly features on Sky News, CNBC, ABC and Bloomberg TV.