At the BizNews Investment conference last week held at Champagne Sports Resort nestled in the midst of the beautiful Drakensburg mountains, value investor Piet Viljoen spoke of a few hidden gems on the Johannesburg Stock Exchange that simply were unloved and overlooked by the market. One of those hidden gems, furniture retailer The Lewis Group, seems to stand out above the rest.
Lewis was founded in 1934 and listed on the JSE in 2004. This is a company that has stood the test of time. But, as we have seen time and time again, in order to continue to be a successful business, a company needs to constantly adapt and pivot.
Lewis has been one of the beneficiaries of Covid-19, the ensuing lockdowns and lifestyle trends such as the work-from-home phenomena that emerged out of the pandemic. With households spending more time in their number one asset, their homes, spend from activities such as leisure and travel were replaced by renovating and refurbishing households.
This is evident in Lewis’ half-year results, where although over two months of sales were lost due to store closures as a result of Covid-19, revenues were flat and earnings were up. To put this in perspective, despite the company losing more than 30% of its trading days for the interim period, it was still able to increase earnings by double-digits. The third quarter trading update was even more encouraging, with sales growing by 17% when compared to the prior period, with the company reporting buoyant Black Friday sales.
Management have done a sterling job leading the business through these uncertain times. They have managed to reduce operating costs, increase dividend payments and continued with its share buyback program. The recent share buybacks have been value accretive to shareholders, with the company repurchasing 3% of the shares in issue at a volume weighted price average of R20.80, with the current share price a touch below R30. Lewis is also un-geared, which means that the company has no debt on its balance sheet.
Its closest peer on the local bourse is Italtile. Italtile has been one of the best performing stocks on the JSE over the last ten years. On a relative valuation basis, Italtile is almost three times more expensive than Lewis. Lewis is on a price-to-earnings ratio of 6 whilst Italtile is closer to 15. The lower the price-to-earnings ratio, all things equal, the more undervalued the company.
One of Piet Viljoen’s reasons behind the retailer being a stand out, is that its liquidation value is more than the market value of the company. Liquidation value is current assets less current liabilities. Current assets represent liquid assets that can be converted to cash within twelve months. Current liabilities are obligations that need to be settled within twelve months. The liquidation value of Lewis is R3.7bn. It’s market capitalisation is a shade over R2bn.
The fundamentals behind Lewis do make for a more than appealing investment case.
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