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Also, I wouldn't have advised to invest at £3, the metrics signalled the company was overvalued. I'm fine investing when the metrics are undervalued and selling when overvalued. At £3 there were collosal risks here, hence why I didn't invest. At this price risk factors are baked into the price, giving this an attractive risk / reward ratio.
Jongle, when I did my due diligence in December I prepared for this. I'm chilled out mate, one of the great things about being an investor not trader. Been here before and have come out the other side very well. The market can stay irrational here for a while, and may take a little longer to reflect fundamentals.
On the 'it will never recover' part, you are wrong there. I do question if you have done any research in the company at times. Strong customer base, growing revenues and a runway to margin expansion.
Currently under around 20%, bought at £1.06. Very confident that this will be a multibagger in the following years. This is a game of patience and will reward those who navigate these periods of volatility.
Buy the dips, hold the rips, ride the trend :)
No working capital cash flow effects have been modelled which is conservative considering the negative historical working capital cycle.
Using a 9.8% discount rate (the long-term S&P 500 return), there is a 42% margin of safety under the base case and a healthy 72% margin of safety under the management case. If boohoo never again retains its previous earnings growth then the downside case shows that the current price is quite fair. Overall I consider the risk-reward trade-off here to be skewed in the investor’s favour at the current share price.
Conclusion
If you can get your head around the supplier issues, this is a rapidly growing, quality business at a knock-down price. Risks pertaining to COVID and market competition exist, but I think boohoo is well positioned to tackle these and thrive. An investment here would align you with insiders who hold a significant equity share and could conceivably return 5x money over five years.
Forward multiples require normalisation to cater for once-off COVID costs
Management are accelerating plans for a US distribution centre which was previously set to open in 2023. I also expect airfreight to eventually normalise somewhat and allow operating distribution expenses to follow suit. Boohoo have a long, steady history of controlling operating expenses as shown above. FY22 will see the opex ratio jump by 2% - 3%, reducing EBITDA margins by the same amount which is an anomaly from a historical perspective. My view is that this should be normalised for when considering the forward multiples. Acquisition costs for the current year are high due to the 6 recent acquisitions, and not likely to recur:
For a company that has grown revenue by 50% p.a. historically and considering that management believe strongly (both based on medium-term guidance and current distribution capex) that revenue will continue to grow by 25% per year, these multiples are far from demanding. Current multiples are more in line with those of Inditex (Zara) and Next PLC, neither of which have grown their revenues over the last five years. The historical earnings multiple for boohoo is also at its 5-year low and at less than a third of the average multiple over the last five years.
Discounted cash flow valuation based on three scenarios
I’ve considered three DCF scenarios and compared the value with the current enterprise value:
Downside case – revenue growth never returns from current levels, distribution costs stay high for the next two years before the opex ratio comes back to 48% and the exit multiple also doesn’t recover (and is conservative considering the 10% annual growth) at 12.5x.
· Base case – revenue growth increases to 15% from year 2, distribution costs take 1 year to normalize back to 47% and the EV / EBIT multiple adjusts up to 16.0x which I consider conservative for a business growing its topline at 15% p.a. and below the current ASOS valuation.
· Management case – growth returns to the 25% annual management target from year 2, distribution costs normalise immediately to 47% and the business is valued for its growth (although nowhere near historical levels) at 20.0x EV / EBIT. I consider the earnings growth possible considering all of the recent acquisitions and the current small market share in a growing online fashion industry.
Management have mentioned that the current capex plan will give them £4.7bn of net sales capacity by 2023. So in addition to the significant capex in the current year (£125m - £175m excluding new office space) I’ve allowed for a further £150m in year 1 capex in the DCF for all scenarios, which seems reasonable. This is in addition to the ongoing maintenance capex of £40m on physical infrastructure and £15m on software each year which is above historical levels. Under the management case I’ve allowed for a further £150m of capex in year 4 to keep pace with the growth in revenue.