New Zealand-based children’s clothing company Pumpkin Patch ($PPL.NZ) announced their half-year result in late February. The company announced a 7% drop in half-year profits - but the share price rose on the news.  The reason for this is that market participants expected a larger decrease in profits and had that factored into their valuation models.  The better than anticipated result meant the valuation of PPL.NZ was increased and the current share price looked cheap.  This resulted in more buyers and a higher share price - you can see the jump in the graph below.  With the current share price of $PPL.NZ at NZ$1.05 we decided to have a look at the intrinsic value.

Valuecruncher Interactive Analyst Report For $PPL.NZ (New Format)

Valuecruncher produces a valuation of NZ$1.07 for $PPL.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 2% above the current share price of NZ$1.05.

Assumptions

• Revenue: Reuters aggregates five analysts covering $PPL.NZ and these analysts have mean estimates of 2009 and 2010 revenues of NZ$422.6 million and NZ$442.9 million respectively. For our analysis we have used NZ$420 million in 2009, NZ$440 million in 2010 and NZ$465 million in 2011.

• Profitability: We have used an EBITDA margin of 9% in 2009 rising to 12% in 2011. Reuters has $PPL.NZ‘s EBITD margin at 10.91% last year with a five-year average of 14.76%.

• Capital Expenditure: We have assumed capital expenditures of NZ$18 million in 2009 rising to NZ$30 million in 2011 and beyond.

• Discount Rate: 11.0%. The PwC New Zealand cost of capital report lists $PPL.NZ with a WACC of 12.9% and the wider New Zealand market at 9.1%. We feel that 12.9% is too high for $PPL.NZ and have used 11.0%.

• Terminal Growth Rate: 4.0%.

Our analysis incorporates the cash and debt the $PPL.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

PPL.NZ has had tough ride over the last year. The share price has dropped from NZ$3.08 to as low as NZ$1.05. Currently PPL is trading at NZ$1.12. We thought it was time to put some numbers around PPL.NZ.

Valuecruncher valuation model of PPL.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$1.11 for PPL.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is right at the current share price of NZ$1.12.

Assumptions

• Revenue: Reuters aggregates seven analysts covering PPL.NZ and these analysts have mean estimates of 2009 revenues of NZ$441 million. For our analysis we have used NZ$425 million in 2009, NZ$450 million in 2010 and NZ$485 million in 2011.

• Profitability: We have used an EBITDA margin of 12% in 2009 rising to 13% in 2011. Reuters has PPL.NZ‘s EBITD margin at 10.91% last year with a five-year average of 14.76%.

• Capital Expenditure: We have assumed capital expenditures of NZ$18 million in 2009 rising to NZ$35 million in 2011 and then NZ$30 million beyond that.

• Discount Rate: 11.0%. The PwC New Zealand cost of capital report has PPL.NZ at a WACC of 13.5% with the wider NZ market at 9.5%. We feel that 13.5% is too high.

• Terminal Growth Rate: 4.5%.

Our analysis incorporates the cash and debt the PPL.NZ balance sheet – Valuecruncher calculates a net debt number.

Disclosure: None

Valuecruncher has placed a value on Pumpkin Patch of $3.89 per share with a range of $2.46 to $5.55, compared with the current share price of $4.25.

Revenue Growth

Because of Pumpkin Patch’s unstable revenues growth we have taken fairly conservative estimates of future growth.  Revenues growth has been decreasing from 27.28% in the 04/05 period to 11.09% in the 05/06 period.  The revenues growth for the 06/07, 07/08, and 08/09 periods has been estimated to be 10%, 9% and 8% respectively, converging closer to the comparator Hallenstein Glasson Group’s current revenues growth of 7.13%.

EBIT Margin

The EBIT margins for Pumpkin Patch have been increasing steadily from 6.40% (2003) to 14.47% (2006) and with its current expansion in all four of the markets it is present it (NZ, AUS, UK and US), it is likely that these EBIT margins will continue to grow. For this reason we have used an EBIT margins of 15%, 16%, and 17% for the next 3 periods.

Discount Rate (WACC)

The discount rate that has been applied in the analysis is 10.5%, in line with discount rate for Hallenstein Glasson Group, as given in the PwC Cost of Capital Report.

Terminal Growth

The terminal growth is assumed to be 3%.

Commentary

The higher EV/EBIT multiple can be explained by the larger number of growth opportunities from Pumpkin Patch. As they continually expand into the UK and US markets, whilst growing the number if stores they operate in Australia and New Zealand, we believe that Pumpkin Patch have more opportunities to grow when compared with New Zealand comparators Hallenstein Glasson or Postie Plus.

Pumpkin Patch Valuation