Valuecruncher has placed a mid-point valuation of $9.51 per share on Michael Hill International (MHI) with a sensitivity range of $8.78 to $10.26. This valuation is materially lower than the current market price of $11.44. The current price of $11.44 is at the top end of the 12-month trading range of $6.61 to $11.50. MHI is a very thinly traded stock with over 90% of the shares outstanding held by institutions or insiders. The last significant transaction was a share buyback on 17 August 2007 when the company purchased 246,405 shares at a price of $9.50. The price this buyback occurred at is consistent with the Valuecruncher mid-point valuation.
Michael Hill Operations
Michael Hill International operates 192 jewellery stores in Australia (126), Canada (16) and New Zealand (50) with plans to open another 78 stores over the next three years. The majority of these new stores will be Australia (36) and Canada (36).
MHI grew revenues ($348.8 million) and EBIT (35.1 million) by 13.8% and 44.1% respectively in the 2007 financial year. The significant increase in EBIT reflects a relatively flat operating performance in 2006.
New Zealand stores exhibit the strongest operating metrics with same store sales growth of 4.6% and EBIT margins of 13.9%.
Australian operations had same store growth of 3.4% and EBIT margins of 9.2%.
Canadian operations are still in their relatively early stages with 4 stores opened in the 2007 FY and revenues increasing 60% to $25 million. Canadian stores experienced same store growth of 2.9% with EBIT margins slightly below break-even.
Valuecruncher Valuation Assumptions
Valuecruncher has assumed annualised revenue growth of 14.1% over the next three years driven by the projected new stores. EBIT margins are forecast to fall slightly to 9.6% by 2010 reflecting the lower operating margins currently being achieved in Australia.
Valuecruncher has used a cost of capital of 11%, this is significantly higher than the 8% used in Valuecruncher’s previous valuation of MHI. The cost of capital of 11% reflects the uncertainty surrounding the planned international growth, particularly in Canada.
Valuecruncher has assumed a long-term growth rate of 3.5%.
A key factor in MHI’s valuation is the projected EBIT margins. Canadian stores currently represent 7% of the company’s revenues and are at break-even at the EBIT line. Based on management’s projections in 3 years there will be as many stores in Canada as there will be in New Zealand. The operating margins achieved in Canada will have a significant impact on value.
Valuecruncher Valuation Report – Michael Hill International – 20070924