Value Investing Deep Dive: Tencent |
| Posted: 28 Jun 2021 01:40 AM PDT |
| Posted: 27 Jun 2021 10:24 AM PDT Disclosure: I own 1368 shares at approx. 436p per share Dr Martens PLC Ticker: DOCS Latest Price: 439.60p Market Cap: £4.4bn (c. $6.1bn) Dr Martens is a UK listed company with >60 years of heritage. The company sells footwear across the world and is known for its iconic boots which encompass the signature yellow welt stitch style and the grooved sole. They predominately target the 'young and rebellious' type of consumer although these days their business targets many demographics, including kids. They also sell accessories like shoe related care products and variations of its signature brand. Their timeless 1460 boot accounted for 42% of their FY20 revenues. EMEA, Americas and APAC respectively accounted for 43%, 38% and 18% of revenues. Men and Women account for roughly a 50:50 split for its products recently and historically. The company went public in January 2021 at 370p per share. The main selling shareholder Permira retained a >40% stake in the company post IPO. There's not a lot of historic information going far back available but there's enough I think to form an informed opinion. I could go on about the company but for the sake of brevity I will get to the meat of the thesis. The MarketAs per the IPO prospectus, Statista estimates that in 2019, global retail sales of footwear were £341bn with about 12bn pairs. The industry grew 4.8% CAGR between 2014-2019 and is projected to grow 5.5% between 2020-2025 to reach £439bn. Leather footwear represented 33% of the market but the company thinks it competes in the other footwear categories too. Dr Martens has the highest share (36%) of consumers who "wear the brand for almost everything" when compared to peers. The company calculates that there are an additional 154 million potential consumers in their countries of presence who share similar attitudinal profiles to the 16 million current consumers here who've bought a Dr Martens in the last two years. In assuming the current typical frequency of purchase and average spend per purchase in each market, the company estimates that these 170m total customers indicate potential headroom of >£6bn of annual sales (FY2021 company sales were £773m). Even then, the company thinks the total addressable market is a lot more than £6bn given geographical presence can be expanded outside current countries and penetration within these countries could be deeper. Attractive Investment CharacteristicsHigh returns on capital: Returns on Capital Employed (lease adjusted, after tax) averaged 19% the last three full years of trading. Excluding Goodwill, this number comes to 36%. Cash Return on Capital Invested (lease adjusted) averaged 16% L3Y (I view above 10% as good). High margins: Adjusted EBIT margins were 12.4% in 2018, 16.4% in 2019, 23.1% in 2020 and 24.5% in 2021. The company is benefitting from operating leverage as it expands. Profit margin averaged 9% last 3 years. Quality of earnings: cash conversion has been solid last 3 years (and not derived from working capital tailwinds either). Low leverage: massively de-levered from its days as a private company, latest FY Net Debt / EBITDA (lease adjusted) stands at 1.15x and the company is guiding for 1x at current year end. Cash generative enough to sustain growth/not reliant on outside capital to grow: self-explanatory. Tried and tested product across the world: the product is already accepted across many countries such as France, UK, US and China. This gives scaling significantly less execution risk than, say, a company expanding its product abroad for the first time. See demographic summary below (from the prospectus): Pricing power: Going by volume of pairs sold each year, the company has been growing total numbers sold by 21% CAGR for the last 5 years. This compares to an overall revenue growth of 28% CAGR in that time which both suggests volume driving the majority of revenues and that the product has enough price inelasticity to keep growing despite price increases. Timeless Product: Dr Martens boots have survived through the ages, with the waxing and waning of fashion trends and latest consumer tastes. Additionally, inventory write-downs are de-risked in that the company has less reliance on the 'latest' product than your average fashion company. Director ownership: CEO and CFO own 1.1% and 0.6% of the shares respectively. An additional independent NED recently purchased 20,000 shares at 420p on 21st June 2021. Positive Drivers Going ForwardOperating leverage to drive margin expansion: the company benefits greatly from selling more shoes to more people. Adjusted operating margins have been trending up yearly since 2016, from 10.9% to 24.5% in FY2021. Gross margins have gone from 48% to 61%. Increasing Direct to Consumer through retail and ecommerce: The company presently operates through both the Direct to Consumer (DTC) and Direct to Wholesaler markets. DTC includes e-commerce and retail sales, which together made up 43% of sales in FY2021. The company has guided that it wants to focus more on DTC going forward whilst maintaining key supplier relationships with selected wholesalers. This will likely give Dr Martens better cash management and better margins going forward. As of FY2021, e-commerce made up 30% of total sales and the company's medium-term target is 40% for that and 60% for DTC in total. During the last 5 years, the company has increased its e-commerce sales by 64% CAGR. General footprint expansion: Dr Martens is growing fast in a hugely untapped market. They are guiding to 20-25 new store openings in FY22 (latest total is 135). Sales per store growth has averaged 16% over the last 3 years albeit a substantially lower rate last year owing to the mass closure of retail. Total group-wide revenue growth has averaged 31% over the same 3 years whilst adjusted EBIT averaged 67%. Dividend initiation this year should increase Fund managers' interests: The company will initiate a dividend payout between 25%-35% of earnings going forward and I suspect this will attract many funds with income mandates towards the stock. As the company gets bigger it should attract even more market attention. Substantial untapped market potential: As detailed in 'The Market' above, there is a huge untapped market for the company to take share of. Consumer tastes away from formal to casual wear: As the trend towards less formal wear, more casual grows stronger, I think the Dr Martens boot is well poised to benefit. Key RisksGoodwill is 37% of Assets: this is probably the biggest risk to me as an equity investor here. This is a bit too high for comfort and goodwill impairment risk needs to be taken on board when calculating the cost of equity for this company. Slower than anticipated growth: it can happen. The company is guiding to high teens revenue growth in FY2022 and henceforth mid-teens revenue growth in the medium term. An estimated Earnings Power Valuation of the company shows me that prospective growth makes up c. 38% of the company's current equity valuation which is not too bad for a fast grower. I typically try to avoid buying at prices >50% of which incorporate future growth expectations. Other Interesting InformationIPO selling Private Equity shareholder Permira retained a >40% in the company. I should also mention that the company uses the franchise model in locations where it doesn't have an angle. As of the date of IPO it had 107 additional franchise stores, primarily in China, Japan, Australia and Canada. It attributes these revenues to the 'Wholesale' segment. ValuationI assume a number of valuation metrics to ascertain a rough measure of fair value:
Happy to talk about any of the above in more detail. In my view this is a classic Peter Lynch expansion stock caught early. Happy to provide more information on anything but didn't want to overload. Please let me know if you spot any mistakes anywhere. Keen for any thoughts or feedback. Cheers for reading. [link] [comments]  |
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