Page 1 of 3 Problems viewing this email? Click here. 17 May 2012 WHAT IS YOUR RETAIL BUSINESS WORTH? Retail investors generally seek prospects with growth potential, and in this issue of Fair Value Postcard we look at what the market for retail businesses can tell us about the health of the sector and the value of its businesses. Recent transactions In a relatively quiet half year for transactions, the following acquisitions were announced by listed retailers: Recent activity in the retail sector suggests there are deals to be done, however, the current focus on earnings is dictating company values. Retail Food Group is currently trading on an EV / FY13 EBIT multiple of 6.6 times, suggesting that in order to add value to shareholders it will need to leverage the acquisition by expanding the Pizza Capers brand significantly outside its current Queensland focus. Super Retail Groups’ investment in Rebel Sport is more immediately positive, given SRG’s current EV / FY12 EBIT multiple of 11 times. Retailers earning results Our analysis of listed retail entities’ results provides several insights for trading conditions in the first half of FY12, compared with the first half of FY11: http://fhnewsletters.com/rp/358/test.clsp?EmailId=500075550&Token=22E4795FE3... 23/05/2012 Page 2 of 3 Revenues grew by more than five per cent (from the previous half year). Despite the revenue growth, EBIT grew a modest three per cent due to pressure on margins. Investment cashflows by Wesfarmers and Woolworths in their food and hardware businesses and Super Retail Group’s purchase of Rebel Sport dominate investment in the sector whilst medium and small operators significantly scaled back investment spending. Mixed/soft goods retailers are still battling to grow revenues whilst experiencing significant margin pressure. Interestingly, soft goods retailers’ margins exceed other retailers’ margins, despite being under the most pressure. (Clients interested in the underlying data should contact Ferrier Hodgson Forensics.) Despite the turmoil in the sector, the market currently values listed retail businesses at about eight times current earnings (EV/EBIT). The interesting question is what does this mean for non-listed retailers? Benchmarking your business Our experience and analysis of business sales suggests the following general valuation guidelines (EBIT multiples) for retail businesses: 2-3x Earnings under pressure or expected to decline. Strategic turnaround investment. Requires capex and or restructuring to return to average profit levels. Alternatively, smaller sized enterprises. 4x Well run, mid-sized private business with moderate growth prospects. 6x Well run, larger-sized business with growth prospects, suitable for acquisition by a listed entity. 8x Average listed multiple (Enterprise Value / EBIT - current year). These multiple ranges ebb and flow based upon the strength of the economy at any particular point in time. A well-run retail business should be worth in excess of four times EBIT at the mid-point of an economic cycle. The skill in retail valuation is understanding the earnings drivers for the business and accurately predicting where earnings should be, as well as identifying how a purchaser could grow the earnings and by how much. Retailers looking to enhance the value of their business need to be future focused, demonstrating a clear direction for their business and establishing a strategy for growth. Recent activity in the retail sector suggests there are deals to be done, however, the current focus on earnings is dictating company values. The present fear of negative comparable store growth still weighs on the market and potential investors remain tentative, looking for strong growth or synergistic prospects. If you would like further information on any of this or would like us to provide a valuation of your retail business, please contact us directly. George Kompos Executive Director +61 3 9604 5150 Fair Value Postcard is a regular update providing insight and opinion on valuation and transactional due diligence issues. If you have any comments or suggestions, please contact George Kompos directly at [email protected]. If you know of others you think would be interested to receive the postcard, please send us their details. If you have been forwarded this email and wish to subscribe click here. If you wish to unsubscribe click here. If you wish to see other publications by Ferrier Hodgson click here. This publication is intended to provide a summary of the subject matter. It does not purport to be comprehensive nor to render advice. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice. http://fhnewsletters.com/rp/358/test.clsp?EmailId=500075550&Token=22E4795FE3... 23/05/2012 Page 3 of 3 For more information about our services, please contact one of our offices. Or find out more at: www.ferrierhodgson.com: Sydney: Steve Sherman +61 2 9286 9905 [email protected] Adelaide: Martin Lewis +61 8 8100 7657 [email protected] Perth: Martin Jones +61 8 9214 1405 [email protected] Malaysia: Andrew Heng +60 3 2273 6227 [email protected] Melbourne: Peter McCluskey +61 3 9604 5109 [email protected] Brisbane: Will Colwell +61 7 3834 9205 [email protected] Japan: Kentaro Mochizuki +81 3 3560 8301 [email protected] Singapore: Tim Reid +65 6416 1400 [email protected] http://fhnewsletters.com/rp/358/test.clsp?EmailId=500075550&Token=22E4795FE3... 23/05/2012