Could Nick Scali be the best purchase you make this year?
Key statistics: ASX: NCK
Closing share price: $7.150
52-week high: $7.60
52-week low: $-
Most recent dividend: 20c
Annual dividend yield: 4.78%
Furniture importer and retailer Nick Scali continued its stellar run during 2017.
Over the past 12 months Nick Scali (ASX: NCK) has produced a return of 16%, including dividends, and over the past three years it has returned 188%.
That means $10,000 invested three years ago would be worth almost $29,000 today. The recent results reflect a much longer history of good management.
Nick Scali was established more than 50 years ago by the Scali family and listed in 2004.
During its listed life of 13 years, net profits after tax and EPS have grown by 5.5 times or 14%pa. The share price has increased from $1.00 to $7.14 today.
The company has also paid out a lot of dividends and is currently offering a dividend yield of 5.2%.
A company that can increase earnings by 14%pa over 13 years, whilst paying out about two thirds of earnings as dividends, and reinvesting the rest, without ever needing to raise capital and making minimal use of debt, is doing something right.
In financial year 2017, revenue grew by 15%. At the same time expense declined, leading to profit growth of 42%.
Profit margins have increased from 9.6% to 16.0%. Return on equity has been consistently high and hit 53% in FY17.
The recent rise in the currency is also a short-term positive for NCK's bottom line as the cost of buying imports declines.
Importantly, these profits are translating into cash with NCK generating cash flow well in excess of its requirements.
On a long-term basis operating cash flows have been sufficient to cover capital investment and dividends, meaning the company has had no need to raise funds. The balance sheet is also strong with cash exceeding debt.
Countering the good news, it is reasonably likely that property markets in NSW and Victoria will experience a slow down, particularly in regards to new apartment sales with signs it has already begun.
This will have a flow on effect for furniture sales and make it harder to achieve sales growth. These markets make up about 60% of Nick Scali stores. Offsetting this, the property market in WA is expected to start picking up, along with parts of Queensland.
In financial year 2018 NCK plans to open a further eight to 10 stores including its first overseas store in New Zealand. Despite an expectation that sales growth will slow, market analysts are still forecasting profit growth of 9%.
The effect of the property market is likely to be a short-term issue. Looking out 10 years, the key questions are does the business have opportunities for growth, and is it sufficiently well run to capitalise on those opportunities.
Based on its track record, the level of execution risk is low.
At the moment the market seems to be factoring in very little opportunity for long term growth, and this may be overly pessimistic.
Given the high ROE, high dividend yield and PE ratio of about 14, NCK would seem to be reasonably priced given its ability to deliver growth.