Author Topic: GBT.TO - BMTC Group  (Read 5609 times)

Cigarbutt

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GBT.TO - BMTC Group
« on: August 03, 2019, 02:14:21 PM »
This is a company which was briefly mentioned in the share buyback thread that LC started.

Thesis: The company recently reported poor results and there are expectations of more to come. IMO, the company will benefit (growth of sales and margins) when there will be a return to a more ‘normal’ competitive landscape and when it will no longer be considered out of favor.

It is a relatively small and Quebec-based furniture retailer that was formed about 30 years ago and has grown significantly and profitably during the first 20 years. From year 2000 to 2009, it grew sales by about 50%, improved margins and shares performed well during that time frame. The industry is boring and the corporate level is very low profile. Since public inception, if my numbers are correct, the company has repurchased and retired 83% of its shares, repurchasing activity has been regular but occasionally opportunistic and a significant part of the total return has resulted from this capital allocation decision. They are strong operators, have been able to grow or maintain market share in key customer segments and have adapted well to the changing dynamics of the industry. I would say that, because of their relatively high margins, absence of debt and free cash flow potential, they are likely to outperform peers, especially during downturns.

Since 2009, the competitive landscape confirmed evolving changes with the expansion of national retailers (Leon and The Brick, which have combined), the appearance of many small players as well as the online Wayfair-type of threat in a relatively fragmented and highly competitive industry. The national chains gained market share and achieved adequate net margins (4 to 5%) and return on capital. Since 2009, BMTC has reacted by lowering net margins from 8-10% to 5-6% and basically revenues have remained flat (essentially the same number of retail outlets) and have even come down lately.

The 2019 annual report (end of yr Jan 31st) reveals revenues of 740.0M. The thesis relies on basically a reversion to the mean, given specific circumstances. Given the below-mentioned assumptions, a CAGR of 15 to 25% could be achieved (including an assumed dividend yield of 2-3%).

-Over the next 5 years, revenues grow by 20%, net margins reach 8%, a PE of 12 and 15% net reduction in share count
-Over the next 10 years, revenues grow by 40%, NM at 8%, PE at 12 and a 30% net reduction in share count
-The daughter of the founder, who has recently been named CEO will continue along the same principles

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There is a risk of adverse results with macro concerns but this seems to be, at least partly, priced in already and management has painted a picture with dark clouds. There has been a recent auditor change but I find corporate governance to be overall strong (given top execs pay level and structure, the elimination of the dual share structure along the way, the composition of the Board, the way they dealt with an asset-based paper crisis a while back and generally how conservative their reporting is).  Another negative includes a relatively high pension obligations.

An additional potential negative for them is the advent of e-commerce in their sector of activity. They have invested significant capital to establish an online platform in order to get sales from that channel and, especially, to increase customer presence in their physical stores to actually complete the transactions.

On the positive side, the company has now, on its books, 116.7M of net cash and investments, which comes to about 3.39$ per share (last share trade = 10.75$).

A potential catalyst may come from the founding family whose percentage of ownership has crept up over the years. As last reported, the Chairman holds 62.0% of shares. He was the CEO in 2015 when the company completed a significant buyback (15-16% of shares outstanding for 108M, per share 15.50$) so he may find the trajectory interesting along the way to the return to the mean.

The discussion is open here and now but will become quiet if the level of interest shifts into higher gear as the liquidity is fairly low.