Despite recently exceeding consensus forecasts, shares in furniture retailer Nick Scali Limited (ASX: NCK) fell slightly after releasing its FY21 results last week, which you can read about here.
The retailer, which sells sofas, dining tables, and other furniture has been one of the biggest winners from the “stay at home” COVID-19 thematic. Today, Nick Scali’s shares are trading close to all-time highs and the company has a market capitalisation just shy of $1 million.
NCK share price
Are Nick Scali’s shares cheap?
The full-year result showed signs of continued demand, which translated nicely into increases across revenue, gross margin and gross profit. Yet, the market has chosen to value its shares at around 12x its FY21 earnings (profit) per share, which seems fairly cheap compared to some of its peers.
A common approach to investing is that a low P/E is good (cheap/buy) and a high P/E is bad (expensive/sell). Quantitative methods like this can work, but it usually involves trading on a shorter time frame often in low-quality companies.
As part of the Rask investment philosophy, we look for high-quality companies that have the ability to increase their intrinsic value over time. Here’s another way I think about valuation multiples such as the P/E and Price/Sales (P/S): You can use them to get a rough sense of optimism priced into a company’s valuation based on the market’s perception of the future. So how can we apply this to Nick Scali?
Uncertainty ahead
Nick Scali managed to double its net profit figure to $84.2 million during FY21, but it will only pay a final dividend of 25 cents per share, up from 22.5 cents in FY20.
Management told the market this was due to uncertainty around its supply chain, particularly Vietnam and Malaysia where it sources its products from. These complications have seen international freight costs rise due to an “unsustainable” level, according to CEO Anthony Scali.
So, the business is effectively hoarding away some cash as a buffer against further delays and higher freight costs, which seems to be a logical decision.
While international borders remain closed in Australia, I imagine Nick Scali will see elevated demand as holiday money continues to be redirected into home improvements and other similar areas.
Given the slow roll-out of the vaccination program in Australia, Nick Scali could continue to benefit until the rules around travel change.
Summary
Nick Scali’s shares may seem fairly cheap, but the market seems to be accurately pricing in the uncertainty around the reopening of borders.
If it turns out that sales have indeed been “brought forward”, there might be the opportunity to pick up some shares at a more attractive price than current levels.
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