Michael Hill International Limited (MHJ) recently moved its primary listing to the Australian stock exchange on July 6, 2016, while still maintaining a secondary listing in New Zealand, where the company has been listed on the NZ stock exchange since 1987. The company’s origins date back to 1979, with founders Michael and Christine Hill opening their first store in Whangarei, NZ.
MHJ is a jewellery retailer that now operates 313 stores in Australia, NZ, Canada and the United States. The company owns two brands, Michael Hill and Emma & Roe, which operate out of 297 and 16 locations, respectively. MHJ differentiates itself from its jewellery competitors through the use of proprietary branded collections in its stores.
Why Michael Hill has gained our attention.
Key strengths of the company:
Established market presence: Michael Hill is a prominent brand in the Australian and New Zealand retail industries and has an estimated market share of circa 11pc in Australia and 20pc in NZ (source: IBISWorld). The company has a long history in the Australian and New Zealand markets, with operations commencing 29 and 37 years ago, respectively.
A vertically integrated retailer with exclusively developed product: MHJ is a vertically integrated business that designs, develops, manufactures and sells jewellery across its vast store network. This model affords the group strong gross margins of circa 62pc.
Strong senior management team: While the recent CEO departure is of some concern (given his resignation was relatively sudden and with little notice), the remaining Senior Management team is impressive with an average tenure of great than 20 years within the business.
A disciplined approach to capital allocation: Over the years, MHJ has shown a strong capital allocation discipline in terms of its store/brand rollout strategy and investment in the business.
52pc family shareholding: The founding Hill family shareholding of 52pc provides plenty of skin in the game and alignment with other shareholders.
Key growth opportunities of the business:
Michael Hill store rollout underpinned by Canada: While Michael Hill’s Australian and New Zealand operations are relatively mature in terms of footprint growth, there remains significant rollout potential in Michael Hill’s Canadian and US (pending a successful trial) markets.
Emma & Roe rollout just beginning: Since the Emma & Roe store concept was initially piloted in 2014, the concept has now grown to 16 stores. Following the successful trial, MHJ has stated a long-term target of circa 300 stores, which will provide long-dated footprint and earnings growth for MHJ, in our view. The rollout will initially be focused in Australia and NZ.
Category expansion: MHJ has focused on expanding its key categories in recent years through an expanded diamond range and through ‘branded collections’ which attract a premium price point and a 5% margin premium. In addition, ancillary services such as the Professional Care Plan and in-house credit are higher margin and strong profit drivers for the group.
Margin expansion: While we expect Michael Hill’s NZ earnings before interest and tax margin is now at peak levels, we believe there is further incremental margin upside available in the Australian market. More importantly, we see material margin upside in Michael Hill stores in Canada and Emma & Roe store in Australia& NZ as store rollouts reach critical mass.
We value MHJ at $1.92 vs the share price of $1.61, at the time of writing this article. We are attracted to the long-dated and multi-faceted nature of MHJ’s growth profile, which we believe can deliver a three-year earnings per share compound annual growth rate of 19.5pc. This is a very strong growth profile, particularly when compared to the rest of the listed retail sector.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
