Excellent analysis. Now before you read the below, let me add this disclaimer: YES I think Wickes is undervalued, but then so is Kingfisher. So they are undervalued on market-wide basis but not on a peer-basis.
Howdens Joinery operates a very different business, so hard to use that as a comparable. Their clients lean more towards builders who know Howden's products, whereas Wickes customers are more DIY. Howden's business model is working well and it shows: they grew revenue at an insane rate last year.
Kingfisher is a better company to use as a comparable, while they also seem undervalued their business is much more similar to Wickes' than compared to Howdens. Wickes is more DIY than "Do it for me". Although Wickes will try and compete in the "Do it for me" market, they won't get far as this is Howden's game completely. Wickes is going to play catch-up.
TPT shouldn't be used as a comparable. B&M also, should not be used as a comparable. Different market. I'm even nervous to use TPK as a comparable because they are a builder's merchant.
So best comparables I can see here are Kingfisher, Howden's. Howden's deserves a better multiple, they have a better more innovative faster growing business...Kingfisher trades relatively the same.
On the comps point, but I don't think one can limit comps for WIX to KGF alone - even KGF is a different business/model as you mention.
The reality is that given WIX's broader 3-segment model it competes against a variety of alternatives, not just pure DIY, and there is no pure-play comp for it. WIX does compete against Amazon and B&M for example on certain SKUs, and the ultimate drivers of say WIX vs. Amazon vs. B&M for a similar DIY item are the same (pricing/availability/quality under a value-retail proposition).
Similarly vs. Howdens or TPT end-drivers of demand are similar and in the absence of pure comps (local private operators) one has to benchmark value for WIX against the most broadly comparable public peers available. Not perfect comps, but relevant nonetheless.
Also, while I don't disagree that KGF may be cheap too, I think there are some factors at play that still support a higher rating for WIX (e.g. superior stock turns, margins, growth, lower-cost/more efficient op model etc).
Hope this makes sense, and thanks again for reading and commenting.
Thanks for reading and commenting - agree capital allocation here is important and I believe management will elaborate on this further in the full year results due later this week. Net cash supports the balance sheet given the leasehold model, and KGF, TPK and other peers also maintain reasonably large cash reserves to support rental obligations.
A buy back is possible but I don't believe that would be the main catalyst to drive the stock up towards my Base Case valuation (although it would certainly help).
I really don't understand why anyone would count store leases as part of net debt. It doesn't make any sense, right?
If EV includes lease liabilities then frankly it should be compared with EBIT pre-rental expenses (roughly GBP 100 million according to the prospectus), i.e. almost GBP 200 million? Then if you own those lease liabilities as well as the equity you'll get almost GBP 200 million per year. Clearly GBP 1 billion in EV is too low to get access such yearly income.
Under the IFRS 16 accounting standard introduced in 2019, UK retailers and businesses with significant leasehold obligations now report lease liabilities as part of their debt and leverage profiles - its become a market convention, although my view is that rent is just a business expense like utilities, insurance etc.
However to be consistent with company reporting and how analysts are now appraising companies with lease liabilities I've included leases in my debt and EV analysis here. You're correct on your EBITDA number of £200M - ltm EBITDA on lease/rent adjusted basis is £214m to be exact, which under the EV of ~£1bn at the time of writing gets me to the 4.7x multiple cited in my analysis. Putting it more simply, EBITDA is now EBITDAR post the implementation of IFRS 16 reporting.
If you exclude lease "debt" from EV and deduct the £100m of rent from EBITDA(R) , the EV/EBITDA multiple in the conventional (pre-IFRS 16 sense) is 2.3x , which as you say is too low.
I believe I've commented on why I presented the analysis this way in the Valuation Summary section, apologies if unclear.
Yes, sorry - your write-up was fantastic, I was just thinking aloud... trying to make sense of it all.
I pay the most attention to EV (ex lease) multiples against EBIT... and 5.1x looks very cheap indeed.
Wickes (WIX LN) 2020 (excl impairments)
Revenues 1347
Cost of products -838
Gross profit 509
Selling & marketing -324
G&A -104
EBIT pre-rent 82
Rent -32
EBIT 50
Taxation -9
Net income 40
EV/Revenues 0.8x
EV/EBIT pre-rent 12.7x
EV/EBIT 5.1x
P/E 11.2x
But they've had a lot of adjusting items in the past few years. Here are my numbers if you include all of those adjusting items (=restructuring costs) and assume a 19% tax rate.
Wickes (WIX LN) 2020 (incl impairments)
Revenues 1347
Cost of products -838
Gross profit 509
Selling & marketing -324
G&A -125
EBIT pre-rent 61
Rent -32
EBIT 29
Taxation -5
Net income 23
EV/Revenues 0.8x
EV/EBIT pre-rent 17.1x
EV/EBIT 8.7x
P/E 19.2x
So whether it's right to exclude those adjusting items or not seems key to the analysis.
Fwiw, I think your EBIT numbers are post-rent expense. They report PBT which, I believe, is net of all finance related charges (including lease expense). So the multiple is actually well lower.
Fantastic! A share repurchase program could serve as a catalyst as well. They should use some cash on the balance sheet and FCF to buy back a ton of very cheap stock.
Thanks Roman. As I mention above, a buy back is possible but I don't believe that would be the main catalyst to drive the stock up towards my Base Case valuation, but it certainly would help with share price support.
Nice idea and well explained. I like the fact that is a spinoff but just a question, did you see the opinions in Google about their stores? They are not really positive. What are you're thoughts about it?
Terrific analysis and very thoughtful and reasoned. Thanks for the reassurance as someone who is sitting on a pile of the shares bought just before the recent down tick in the price. I’m happy to look at a 2 year time frame and so will stay in on the basis that sound economic sense will prevail.
Thanks for wour work Connor. It´s an amazing thesis. If I may I would like to ask two questions:
1- The lease liabiities has and incremental of 4% that amount more or les 30m of interests. Do you consider this interests to calculate FCF even though they are not a bank interests?
2-You have an staggering investment level. Where did you learn it? Any book, mentor, course that you did/read/follow that yoy can recommend to me?
Superb write-up (and agree with the thesis) - subbed.
A few observations / questions:
1. Agree with the other commenter on comparables although even KF is imperfect as it is c.50% trade/DIFM (think Screwfix, Tradepoint etc.). Interesting to also benchmark against some of the US comps (e.g. Home Depot, Lowe's)
2. 2.3x pre-IFRS 16 EV/EBITDA feels low; does that include (estimated as unlikely disclosed) lease costs in the denominator? As a broad rule of thumb in my experience these kinds of businesses have a lease multiple (IFRS-16 lease liability / IFRS-16 D+I) of 3-4x, and the post-IFRS-16 EV/EBITDA is mathematically somewhere between the pre-IFRS 16 multiple, and the lease multiple (the exact multiple depends on the relative size of the IFRS adjustment vs EV and EBITDA, but those are the bookends). In other words 2.3x pre-IFRS 16 EV/EBITDA would imply a lease multiple of probably well over 5x to get a post IFRS-16 multiple of 4.7x, which feels unusual (but not impossible)
3. Do you use Koyfin for all your data (multiples, consensus etc.)? If so how does it compare to the professional platforms you presumably used in your previous career (CapIQ/Factset etc.)? I have experience with those platforms but Koyfin looks on the face of it good bang for buck - considering trying it out for my own PA use.
4. How do you come up with your names to deep-dive? Some kind of data screening or less scientific than that?
Thanks and look forward to the future instalments.
Hi there, thanks for reading and for subscribing, much appreciated.
1. I understand the point but I don't think one can disregard the other comps here as there is overlap and WIX do compete with them in some respects; furthermore the ultimate drivers of comps' performance are the same as for WIX
2. 2.3x was correct at time of publishing (share price has moved since, and FY21 results subsequently published) - this is based on EV excluding lease "debt" and EBITDA net of all rent; so market cap then of 450m - cash of 204m = EV of 246m vs. pre-IFRS 16 EBITDA (at time of writing) of 105m = 246/105 = 2.3x
WIX's lease multiple at time of writing 769m of lease obligations on 108m of total rent /D+I ROU expense = 7x on a gross basis (leases net of cash is 565m/109 = 5.1x on net basis).
3. Yes I use Koyfin for my data, and Koyfin pull/source all their data from CapIQ. I've used CapIQ previously and Koyfin seems consistent with CapIQ. I would recommend Koyfin.
4. Just reading as widely as I can, and actively looking for themes and ideas that might lead to something interesting.
thanks for your writing. It seems as you mention a Greenblatt's spin off situation. I can t agree completely about your take over target point, as i don´t see a clear path to growth (ie new stores) other than market growth.
I would like to see 2 things: a CEO with more experience in the company more than 10 years (Fraser Longden seems the one who has been with wickes since 2014, the rest seems ad hoc hires) and more share buys by insider.
Another aspect to consider is in the "spin off manual" you usually expect reduction of expections by the management to benefit from the spin off.
On growth, there are multiple levers for growth here (DIFM, online, TradePro) as well as management announcing up to 20 new stores over the next few years.
Agree on insider buys - note the CEO has started buying stock recently, small amount initially, but perhaps more buys will follow.
Excellent analysis. Now before you read the below, let me add this disclaimer: YES I think Wickes is undervalued, but then so is Kingfisher. So they are undervalued on market-wide basis but not on a peer-basis.
Howdens Joinery operates a very different business, so hard to use that as a comparable. Their clients lean more towards builders who know Howden's products, whereas Wickes customers are more DIY. Howden's business model is working well and it shows: they grew revenue at an insane rate last year.
Kingfisher is a better company to use as a comparable, while they also seem undervalued their business is much more similar to Wickes' than compared to Howdens. Wickes is more DIY than "Do it for me". Although Wickes will try and compete in the "Do it for me" market, they won't get far as this is Howden's game completely. Wickes is going to play catch-up.
TPT shouldn't be used as a comparable. B&M also, should not be used as a comparable. Different market. I'm even nervous to use TPK as a comparable because they are a builder's merchant.
So best comparables I can see here are Kingfisher, Howden's. Howden's deserves a better multiple, they have a better more innovative faster growing business...Kingfisher trades relatively the same.
Thanks for reading and commenting.
On the comps point, but I don't think one can limit comps for WIX to KGF alone - even KGF is a different business/model as you mention.
The reality is that given WIX's broader 3-segment model it competes against a variety of alternatives, not just pure DIY, and there is no pure-play comp for it. WIX does compete against Amazon and B&M for example on certain SKUs, and the ultimate drivers of say WIX vs. Amazon vs. B&M for a similar DIY item are the same (pricing/availability/quality under a value-retail proposition).
Similarly vs. Howdens or TPT end-drivers of demand are similar and in the absence of pure comps (local private operators) one has to benchmark value for WIX against the most broadly comparable public peers available. Not perfect comps, but relevant nonetheless.
Also, while I don't disagree that KGF may be cheap too, I think there are some factors at play that still support a higher rating for WIX (e.g. superior stock turns, margins, growth, lower-cost/more efficient op model etc).
Hope this makes sense, and thanks again for reading and commenting.
Thorough write up of what seems to be an insanely cheap company 🙏
The big question for me is capital allocation though. Why do they even have so much net cash? Time for some buybacks!
Thanks for reading and commenting - agree capital allocation here is important and I believe management will elaborate on this further in the full year results due later this week. Net cash supports the balance sheet given the leasehold model, and KGF, TPK and other peers also maintain reasonably large cash reserves to support rental obligations.
A buy back is possible but I don't believe that would be the main catalyst to drive the stock up towards my Base Case valuation (although it would certainly help).
Thanks for the idea... looks very compelling.
I really don't understand why anyone would count store leases as part of net debt. It doesn't make any sense, right?
If EV includes lease liabilities then frankly it should be compared with EBIT pre-rental expenses (roughly GBP 100 million according to the prospectus), i.e. almost GBP 200 million? Then if you own those lease liabilities as well as the equity you'll get almost GBP 200 million per year. Clearly GBP 1 billion in EV is too low to get access such yearly income.
Hi Michael,, thanks for reading and commenting.
Under the IFRS 16 accounting standard introduced in 2019, UK retailers and businesses with significant leasehold obligations now report lease liabilities as part of their debt and leverage profiles - its become a market convention, although my view is that rent is just a business expense like utilities, insurance etc.
However to be consistent with company reporting and how analysts are now appraising companies with lease liabilities I've included leases in my debt and EV analysis here. You're correct on your EBITDA number of £200M - ltm EBITDA on lease/rent adjusted basis is £214m to be exact, which under the EV of ~£1bn at the time of writing gets me to the 4.7x multiple cited in my analysis. Putting it more simply, EBITDA is now EBITDAR post the implementation of IFRS 16 reporting.
If you exclude lease "debt" from EV and deduct the £100m of rent from EBITDA(R) , the EV/EBITDA multiple in the conventional (pre-IFRS 16 sense) is 2.3x , which as you say is too low.
I believe I've commented on why I presented the analysis this way in the Valuation Summary section, apologies if unclear.
Yes, sorry - your write-up was fantastic, I was just thinking aloud... trying to make sense of it all.
I pay the most attention to EV (ex lease) multiples against EBIT... and 5.1x looks very cheap indeed.
Wickes (WIX LN) 2020 (excl impairments)
Revenues 1347
Cost of products -838
Gross profit 509
Selling & marketing -324
G&A -104
EBIT pre-rent 82
Rent -32
EBIT 50
Taxation -9
Net income 40
EV/Revenues 0.8x
EV/EBIT pre-rent 12.7x
EV/EBIT 5.1x
P/E 11.2x
But they've had a lot of adjusting items in the past few years. Here are my numbers if you include all of those adjusting items (=restructuring costs) and assume a 19% tax rate.
Wickes (WIX LN) 2020 (incl impairments)
Revenues 1347
Cost of products -838
Gross profit 509
Selling & marketing -324
G&A -125
EBIT pre-rent 61
Rent -32
EBIT 29
Taxation -5
Net income 23
EV/Revenues 0.8x
EV/EBIT pre-rent 17.1x
EV/EBIT 8.7x
P/E 19.2x
So whether it's right to exclude those adjusting items or not seems key to the analysis.
Fwiw, I think your EBIT numbers are post-rent expense. They report PBT which, I believe, is net of all finance related charges (including lease expense). So the multiple is actually well lower.
Fantastic! A share repurchase program could serve as a catalyst as well. They should use some cash on the balance sheet and FCF to buy back a ton of very cheap stock.
Thanks Roman. As I mention above, a buy back is possible but I don't believe that would be the main catalyst to drive the stock up towards my Base Case valuation, but it certainly would help with share price support.
Nice idea and well explained. I like the fact that is a spinoff but just a question, did you see the opinions in Google about their stores? They are not really positive. What are you're thoughts about it?
Terrific analysis and very thoughtful and reasoned. Thanks for the reassurance as someone who is sitting on a pile of the shares bought just before the recent down tick in the price. I’m happy to look at a 2 year time frame and so will stay in on the basis that sound economic sense will prevail.
Thanks for wour work Connor. It´s an amazing thesis. If I may I would like to ask two questions:
1- The lease liabiities has and incremental of 4% that amount more or les 30m of interests. Do you consider this interests to calculate FCF even though they are not a bank interests?
2-You have an staggering investment level. Where did you learn it? Any book, mentor, course that you did/read/follow that yoy can recommend to me?
Once again, thanks
Cheers
Superb write-up (and agree with the thesis) - subbed.
A few observations / questions:
1. Agree with the other commenter on comparables although even KF is imperfect as it is c.50% trade/DIFM (think Screwfix, Tradepoint etc.). Interesting to also benchmark against some of the US comps (e.g. Home Depot, Lowe's)
2. 2.3x pre-IFRS 16 EV/EBITDA feels low; does that include (estimated as unlikely disclosed) lease costs in the denominator? As a broad rule of thumb in my experience these kinds of businesses have a lease multiple (IFRS-16 lease liability / IFRS-16 D+I) of 3-4x, and the post-IFRS-16 EV/EBITDA is mathematically somewhere between the pre-IFRS 16 multiple, and the lease multiple (the exact multiple depends on the relative size of the IFRS adjustment vs EV and EBITDA, but those are the bookends). In other words 2.3x pre-IFRS 16 EV/EBITDA would imply a lease multiple of probably well over 5x to get a post IFRS-16 multiple of 4.7x, which feels unusual (but not impossible)
3. Do you use Koyfin for all your data (multiples, consensus etc.)? If so how does it compare to the professional platforms you presumably used in your previous career (CapIQ/Factset etc.)? I have experience with those platforms but Koyfin looks on the face of it good bang for buck - considering trying it out for my own PA use.
4. How do you come up with your names to deep-dive? Some kind of data screening or less scientific than that?
Thanks and look forward to the future instalments.
Hi there, thanks for reading and for subscribing, much appreciated.
1. I understand the point but I don't think one can disregard the other comps here as there is overlap and WIX do compete with them in some respects; furthermore the ultimate drivers of comps' performance are the same as for WIX
2. 2.3x was correct at time of publishing (share price has moved since, and FY21 results subsequently published) - this is based on EV excluding lease "debt" and EBITDA net of all rent; so market cap then of 450m - cash of 204m = EV of 246m vs. pre-IFRS 16 EBITDA (at time of writing) of 105m = 246/105 = 2.3x
WIX's lease multiple at time of writing 769m of lease obligations on 108m of total rent /D+I ROU expense = 7x on a gross basis (leases net of cash is 565m/109 = 5.1x on net basis).
3. Yes I use Koyfin for my data, and Koyfin pull/source all their data from CapIQ. I've used CapIQ previously and Koyfin seems consistent with CapIQ. I would recommend Koyfin.
4. Just reading as widely as I can, and actively looking for themes and ideas that might lead to something interesting.
Thanks again for reading and for your comments!
Thanks for the response (and looks like an example where my rule of thumb is wildly inaccurate) - that multiple is staggering on a non-IFRS 16 basis.
Thanks for the info re. Koyfin, didn't know that's where it sourced the data - will give it a try!
thanks for your writing. It seems as you mention a Greenblatt's spin off situation. I can t agree completely about your take over target point, as i don´t see a clear path to growth (ie new stores) other than market growth.
I would like to see 2 things: a CEO with more experience in the company more than 10 years (Fraser Longden seems the one who has been with wickes since 2014, the rest seems ad hoc hires) and more share buys by insider.
Another aspect to consider is in the "spin off manual" you usually expect reduction of expections by the management to benefit from the spin off.
Thanks for reading and commenting Andy.
On growth, there are multiple levers for growth here (DIFM, online, TradePro) as well as management announcing up to 20 new stores over the next few years.
Agree on insider buys - note the CEO has started buying stock recently, small amount initially, but perhaps more buys will follow.
Thanks Conor for your reply. From your experience, how much debt do you think Wickes could take in a PE take over?
3x-4x EBITDA possibly.