CHEAP STOCK #4
Moss Bros (MOSB) 92.6p A downwards drift from 120p in the summer to 92.6p presents a buying opportunity at Moss Bros. The retailer’s strong balance sheet and high dividend yield provide a margin of safety and should limit further downside.
Based on the 6.2p dividend forecast by Cantor Fitzgerald for the financial year to January 2018, Moss Bros’ plump 6.7% dividend yield (as well as recent share price weakness) indicates the market is worried about further earnings downgrades.
We believe the progressive payout will be secure given it has a £21.5m net cash position. That cash pile is approximately one fifth of its market value.
Headwinds facing the selfstyled ‘first choice for men’s tailoring’ include competition, rising labour and currency costs and the squeeze on consumer incomes.
This year’s hire sales were hit by the later timing of Easter, which traditionally signals the start of the wedding season, and a trend towards lounge suits rather than traditional morning dress.
More grooms are choosing to buy rather than hire their wedding suits, which is at least beneficial for Moss Bros’ retail business and Tailor Me personalisation service.
Nevertheless, Moss Bros’ half year results (28 Sep) were strong with pre-tax profit up by 16% to £4.2m.
Retail like-for-like sales grew 5.1% thanks to investment in staffing, stores and product ranges and this positive momentum carried over into the opening eight weeks of the second half period.
Encouragingly, Moss Bros is making progress with numerous online and store initiatives, while online expansion offers an exciting overseas growth opportunity.
‘Despite the short-term headwinds, we continue to see scope for profits to double from the current base over the medium term’, writes Cantor Fitzgerald, a buyer whose 130p price target suggests 40% potential upside.
For the current year, the broker forecasts pre-tax profit improvement from £6.9m to £7.2m for earnings of 5.6p per share, ahead of £7.3m and 5.7p respectively in 2019.
Moss Bros trades on a mere 5.1 times EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) which is too cheap, in our view. It currently boasts 18.4% return on capital employed, according to Stockopedia, which is a very healthy figure. (JC)