ASX:ABY
Adore Beauty Group Ltd
Investment Summary
The fund managers believe that Adore Beauty Group Ltd (ABY.ASX) has shown resilience despite recent share price volatility, with a notable 81% of sales from returning customers in 1H24, indicating strong customer loyalty. In their opinion, the company's efforts in cost optimization and margin expansion initiatives have led to positive earnings and free cash flow, making it well-positioned for future growth. Despite facing challenges in the retail environment, they report that revenue grew by 8% in the first 8 weeks of 2H24. The business maintains a solid financial foundation with a net cash balance sheet of ~30% of market cap, and is currently trading at <0.5x EV/Sales, which the managers consider inexpensive relative to peers. Additionally, they note a healthy ~5x EV/EBITA multiple, suggesting a favorable entry point for investors following the recent decline in share price.
Commentary From The Managers
Spheria Asset Management
31 Mar 2024
$1.24
- Adore Beauty (ABY.ASX) experienced a 7% share price decline in March with no specific company news impacting the fall.
- 1H24 results showcased revenue growth, driven by record average order values and a notable increase in returning customers.
- Returning customers accounted for 81% of sales in the first half, emphasizing the loyalty of the customer base.
- The company reported positive earnings and free cash flow in 1H24, benefiting from cost optimisation and margin expansion initiatives.
- 2H24 has begun positively, with revenue growth of 8% in the first eight weeks, despite a tough retail environment.
- Adore has a net cash balance sheet constituting approximately 30% of its market cap and trades at <0.5x EV/Sales, indicating it is highly undervalued.
- Spheria Asset Management continues to hold because of the strong fundamentals and growth potential outlined in the results.
Spheria Asset Management
30 Sept 2023
$0.75
- Spheria Asset Management has observed a significant share price decline of almost 25% in Adore Beauty Group Ltd in September.
- The share price drop was not related to specific company news but reflects broader market trends affecting micro-cap stocks and consumer discretionary sectors.
- Adore Beauty's revenue decreased by approximately 10% in FY23 from the elevated levels experienced during FY22.
- Earnings have also declined, with the share price falling nearly 90% since its IPO in late 2020.
- Spheria Asset Management has recently initiated a position in Adore Beauty due to the notable pullback in its share price.
- Adore Beauty is recognized as the leading pure play online beauty retailer in Australia, boasting a strong customer loyalty with over 75% of revenues from returning customers.
- The company has a solid financial foundation with a net cash balance of approximately $28 million and a market capitalization of $70.8 million at the time of the investment.
- Assuming a 3% EBITA margin at mid-cycle, Adore is trading at around 5x EV/EBITA, presenting a potential investment opportunity.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.