Buying companies with a global footprint is increasingly a pre-requisite in small-cap investing. This economy has sluggish growth prospects over the next few years and further falls in the Australian dollar will favour companies with offshore operations.
Longer term, successful small caps can quickly outgrow this small market. The best ones think global from day one, are able to scale their venture without huge additional capital, and can “export” their best talent to offshore markets.
This column has identified several tech stocks with an expanding global footprint, namely Freelancer, iSentia Group, iProperty Group and 3P Learning.
Retail is another source of offshore growth. Franchisor Retail Food Group has disappointed this year after soaring gains in 2014 and restructuring write-downs. Beneath the short-term pain is an emerging global operation with excellent long-term potential.
Premier Investments has outstanding international growth prospects, mostly through its booming Smiggle stationery chain. Premier also owns the Just Jeans, Jay Jays, Portmans, Jacqui E, Dotti and Peter Alexander retail chains.
This column covered Premier for The Bull in March 2015 at $12.50 a share. It soared to $14.62 in May and has since eased to $12.11 on profit taking.
Another globally focused retailer, Lovisa Holdings, has a lower market profile. The fast-fashion jewellery retailer listed on ASX in November 2014 through a $102 million Initial Public Offering (IPO) at $2 a share. Lovisa peaked at $3.78 this year and now trades at $3.37.
Chart 1: Lovisa Holdings
Lovisa has good long-term prospects. Like Premier Investments, Lovisa has a retail entrepreneur as its major shareholder. Private investment firm BB Retail Capital, founded by Brett Blundy, owns 41 per cent. BB Retail has invested in Bras N Things, Sanity Entertainment Corp, Adairs and other retailers..
It’s invariably a good sign when successful retail entrepreneurs have a chunk of their wealth tied up in the business. Retailing, possibly more than any other industry, relies on instinct and people who have a knack for anticipating market trends and customer needs.
Lovisa sources latest jewellery fashion trends from runway events and makes them affordable for a mass market in quick time. Rather than release products on a seasonal basis, it responds to emerging fashion trends and social media-influenced tastes.
“Disposable” fashion jewellery is an interesting concept. It means more store visits and product purchases per customer, and reduces the risk of obsolete stock. Lovisa stock ranges from $6.99 to $49.99 – cheap enough at the low end to buy for an outfit and throw away after a few wears.
It’s a growing market. The fashion retail sub-segment in Australia was worth $1.1 billion in FY14 and grew at 8.7 per cent annually over five years, IBISWorld data shows. In a subdued retail climate, particularly in discretionary items, Lovisa has found a growth market.
Lovisa is rapidly expanding offshore. It acquired 21 fashion-accessories stores in South Africa in March for $2 million, doubling its footprint there and becoming that country’s largest fashion-accessories retailer.
Lovisa’s 239 stores is ahead of prospectus forecasts of 225. Eighty offshore stores, mostly in New Zealand, Malaysia, Singapore, South Africa and the Arabian Gulf, are collectively preforming well. Eleven of its 20 top-performing stores are based overseas.
Lovisa reported 27 per cent growth in revenue to $134.3 million for FY15. Adjusted earnings before interest and tax was $24.8 million – about 5 per cent ahead of prospectus forecasts. Overall, the result was broadly in line with market expectations.
A highlight was Lovisa’s FY16 guidance that “we continue our due diligence on larger Northern Hemisphere markets”. The prospectus outlined Northern Hemisphere expansion as a 3-5-year strategy; if it gets there much sooner, earnings could grow faster than expected.
It said it was in discussion with potential franchise partners in several markets, and expected to add a new franchise partner in FY16. Stronger overseas stores growth seems likely as Lovisa diversifies the business and capitalises on emerging and stgeloped offshore markets.
Lovisa is no Smiggle. But there’s a lot to like about its retail concept, management, international store rollout, and potential for a larger Northern Hemisphere expansion sooner than the market anticipates. It’s always pleasing when small-cap IPOs achieve or better their prospectus forecasts. Too many IPO earnings forecasts are inflated.
Four of five analysts who cover Lovisa have a buy recommendation and one has a hold, consensus analyst forecasts show. The median price target of $3.70 suggests Lovisa is about 10 per cent undervalued from the current price. That’s not enough to warrant buying – just yet- but it should be on portfolio watchlists.
Lovisa is a candidate for a bigger share-price pullback or consolidation in this market correction, given its post-listing gains. A share price closer to $3 would look interesting as the market starts to factor in earnings upside from Northern Hemisphere expansion later this year, when more news is provided.
As a $354 million company, Lovisa suits experienced investors who are comfortable with small-cap stocks.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at September 2, 2015.