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Investors can sit comfortably on Nick Scali

Carl Capolingua Carl Capolingua 07/01/2021
Investors can sit comfortably on Nick Scali Investors can sit comfortably on Nick Scali
Investors can sit comfortably on Nick Scali Carl Capolingua
On Tuesday 5 December, furniture and homewares retailer Nick Scali (NCK) reported to the market that net profit after tax (NPAT) for the six months to the end of December 31 2020 would be $40.5m, up approximately 100% on the previous corresponding period (PCP). 

Management noted that better than expected container availability during November and December had facilitated increased delivery volumes. Sales were also ahead of expectations, and appeared to be accelerating in the second quarter. The company’s sales book was at an all-time high at the end of the first half, and this would likely result in significant revenue and profit growth into the second half. 

If the current momentum continues through the second half, and from the company's comments, we cannot see any reason why this shouldn’t be the case, NCK could earn $1.00-$1.05 per share for FY21. This puts the company on a price to earnings ratio of around 10.6, and a dividend yield (assuming the current 90% payout ratio) of around 8.5% fully franked.

Tuesday's profit upgrade follows a trading update in October which flagged better sales, and the company's full year 2019 results which also beat expectations. This implies that: 1. We are seeing a pandemic-induced bump in sales as consumers reallocate travel budgets to home refurbishment, and 2. Management's exemplary track record of executing NCK's superior business model continues despite the uncertainty created by the Coronavirus crisis.

2021-01-07 NCK Fundamentals

Certainly, just looking at the fundamental numbers, the company remains a compelling investment case despite its recent post-upgrade price rise. It is neither expensive compared to its peers, nor compared to the broader ASX200 which has a PE ratio of around 20 and a dividend yield of approximately 4%. NCK has an outstanding track record of increasing its earnings and dividends over the last 5-years, and its return on equity is nothing short of extraordinary. Return on equity is a measure of management's ability to extract net profit from investors' capital. At over 50% on average for the last 3-years, NCK is the market leader on this metric.

The risks to the ongoing strong performance of NCK depend mainly on the sustainability of the recent upswing in consumer spending on home refurbishment and improvement. Without a doubt, NCK is unlikely to continue to double its profits each year. We are surely going to see an eventual moderation in the diversion of discretionary spending away from overseas travel towards spending on the home. However, given the continued dire Coronavirus situation in major North American, European, and Asian travel destinations, and despite the likely roll out of vaccines in 2021, we expect consumer spending on home refurbishment to remain at elevated levels into FY22 before normalising in FY23. This will likely be supported by a robust recovery in the Australian economy through FY21 and FY22 as interest rates remain near record lows, and as the Federal Government continues to provide stimulus.

We do see earnings growth moderating somewhat in FY22 and FY23, but expect earnings to remain at a significantly elevated levels compared to FY20. Despite the expected moderation in earnings growth, the investment case, based upon valuation (PE: FY22 12.4 & FY23 12.1), and yield (FY22 7.2% & FY23 7.4%) alone remains compelling.

We also note that out of the four major brokers that we have research recommendations for, two currently have a strong buy on NCK, one has a buy, and one a hold. There are no sells or strong sells. The average price target for the brokers is $10.30 with a high target of $12.50 and a low target of $9.00. We do expect however, that as more brokers return from holidays, they will likely raise their price targets for NCK.

2021-01-07 NCK Daily Chart

Looking to the chart of NCK, it is in a clear short term and long term uptrend. The recent upswing has taken it above a clear consolidation zone between $7.66 and $9.96. This area should now act as an area of support, and therefore offers investors a potential zone to buy into any pullbacks.

We initially covered NCK as a potential buy on 23 July 2020, and reiterated a potential buy on 29 September 2020 and on 2 December 2020. Our current position is that investors should consider holding existing positions in NCK, or may wish to purchase on any potential pullbacks in the price to around $10. Our 12-month price target for NCK is $12.20.

(Source: AusbizTV January 6, 2021. "$50k Carl Capolingua makes a big call on the future of crypto". Available from: https://www.ausbiz.com.au/media/50k-carl-capolingua-makes-a-big-call-on-the-future-of-crypto?videoId=6428)

This information has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication only. No representation or warranty is given as to the accuracy or completeness of this information.


Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.


Investing in derivative products carries significant risks and is not suitable for all investors. Please be aware that you do not own, or have any interest in, the underlying assets. We recommend that you seek independent advice and ensure you fully understand all risks before trading.

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Meet our contributors
Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Lesego
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Lesego Mthombothi
Market Research Analyst, South Africa

Lesego Mthombothi is an experienced market research analyst and investment professional who proudly holds an honours degree in investment management and completed her CFA level 1.
 
 
 

Mahmoud Alkudsi
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Mahmoud Alkudsi
Chief Markets Analyst, MENA

Mahmoud is a market analyst, with over a decade of experience in financial markets. He follows main market movers and tracks their effect on the price chart. Mahmoud mixes technical and fundamental tools with a deeper focus on the technical side, and with his wide experience in providing educational and guidance materials to all levels of traders, he helps them in making informed trading decisions. Before joining ThinkMarkets, Mahmoud was head of market research departments in different reputed financial companies, where he provided market analysis for a variety of asset classes, including FX, equities, indices, and commodity futures. As an experienced market commentator, he was hosted by too many print and broadcast media, including not limited to Sky News Arabia, France 24, Alarabyia, Alsharq-Bloomberg, and CNBC Alarabyia to discuss key risk events their clear impact on the price action. Mahmoud holds a Master of Business Administration (MBA) from Cardiff Metropolitan University of Wales, UK, and speaks Arabic, English, and Spanish.

Shawn
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Shawn Lee
Market Analyst, Malaysia

Shawn Lee has over eight years of experience in the financial market as a market analyst. Shawn provides market key insights and trade ideas through the market and technical analysis. He also held trader roles and guided traders in maximising one’s trading success.

Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Lesego
Lesego Mthombothi
Lesego Mthombothi is an experienced market research analyst and investment professional who proudly holds an honours degree in investment management and completed her CFA level 1.
Mahmoud Alkudsi
Mahmoud Alkudsi
Mahmoud is a market analyst with over a decade of experience in financial markets. Mahmoud mixes technical and fundamental tools with a deeper focus on the technical side, and has experience in providing guidance to all levels of traders.
Shawn
Shawn Lee
Shawn Lee has over eight years of experience in the financial market as a market analyst. Shawn provides market key insights and trade ideas through the market and technical analysis. He also held trader roles and guided traders in maximising one’s trading success.

This information has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication only. No representation or warranty is given as to the accuracy or completeness of this information.


Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.


Investing in derivative products carries significant risks and is not suitable for all investors. Please be aware that you do not own, or have any interest in, the underlying assets. We recommend that you seek independent advice and ensure you fully understand all risks before trading.

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