Is Adairs Ltd (ASX: ADH) a bargain hiding in plain sight? The company's share price jumped 31% on no news last week, prompting a 'please explain' from the ASX.
The price jump, on more than triple the average number of trading volume, could suggest a significant buyer in the market. It's true that Adairs looks very cheap. Even after the rise, based on annualised results and its forecasts, Adairs is priced at around 8x forecast Earnings Per Share of 11 cents to 13 cents.
At that price, it could also pay close to a 10% dividend.
Good value, or a value trap?
While company debt of $41 million is modest, the company has net tangible assets of minus 4 cents per share, meaning that the entirety of the company's value is in its ability to continue generating profitable sales.
With like-for-like sales growth remaining consistently mixed in recent times, and at least partly dependent on continual clearance and promotional activity, it's hard to argue that the business will grow like-for-like ('same store') sales. These sales are expected to decline further over the full year.
This means that growth will come predominantly from continued expansion of the store network. With ~160-odd stores across the ANZ region, Adairs does appear to have some room to continue expanding here – although it is important to remember that the homewares business is competitive, both online and offline.
I'm also uncertain about the relationship between furniture/homeware sales and the amount of construction activity/ new homes coming onto the market. With some warning signs for both the economy and the housing markets (particularly in QLD and WA), would Adairs sales plunge if home buying/building activity slackened off further? That's something to keep in mind.
I don't know the answer to that question, and I don't have any particular knowledge of the homewares market, so I'm leaving Adairs on the shelf for the time being. For the investor convinced that the business can grow earnings through expanding its store network however, shares could prove a bargain.
