PGR - The PAS Group

[System]

The PAS Group Limited (PGR) is an Australian apparel business with a unique and diversified portfolio of brands covering retail and wholesale across a broad range of customer demographics.

http://www.thepasgroup.com.au

The PAS Group Limited (PGR) is scheduled to list on the ASX on June 16th, 2014.

 

[Ves]

This one caught my interest a bit after it starting falling after the FY results. Think it's on a forward P/E of about 9 or 10 (although I note that they could not re-affirm guidance at the AGM, due to the importance of the summer season.

Still it may be cheap. Some notes that I made:

They own their own brands (Review, Metallicus, Black Pepper) as well as key licences that allow them to distribute some other well known brands in Australia.

They are in the midst of a long-term transition from wholesale distribution model (ie. providing apparel to third-party chains) to a more retail focussed model (ie. selling direct to customer in their own shops). You will note that their store numbers are starting to accelerate and they plan to reach a much higher number in the medium term. This would lead to higher profit margins. However there is execution risk & the need to gain exposure for their own retail stores (ie. Is it their brands that people seek or are they buying the apparel because of where it is currently being sold, for instance Myer, David Jones etc). There will also obviously be some cannibalisation of wholesale sales as noted by the company.

Some risks:

Cyclical earnings - this company sells goods that are discretionary in nature. There is earnings risk for those who pay price multiples based on the high-end of the cycle.

They have Exposure to USD - manufacturing is sourced from Asia, falling AUD would mean lower profit margins if they cannot pass on expenses in a soft retail market.

Licensed sales exposure (think Oroton and Ralph Lauren) - agreements to distribute brands owned by other companies (significant risk to profits if license is not renewed)

- however, there is diversity in licensed brands to mitigate this risk & some potential scale benefits from the vertically integrated model (they claim no brand accounts for more than 26% of sales)

- they also claim to have long-standing customer relationships with licence owners

One of their segments Designworks is an owner, marketer and supplier of licensed and owned brands. Has in-house design for Big W, Target, Myer & Kmart generic branded apparel. However, there was some discussion that they were moving from generic branding to named branding. Not sure how this affects earnings.

They also have some vertical integration across their brands, and cater to a wide range of age and price points, and there may be some operational scale benefits from this as the revenue base grows.

Has anyone had the chance to have a close look at this one? It looks cheap on the surface, but pricing in some of the risks they face (especially as they do lack control over some of the brand content) it's probably not far from fair value at the very best, especially considering competitive advantage (if any) looks relatively unknown at this point.

Disclosure: not held.

 

[Ves]

And there's the downgrade. Another IPO, another set of investment bankers and company managers who could be argued to have dressed a prospectus up with overly ambitious numbers....

Still not holding.

 

[piggybank]

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And there's the downgrade. Another IPO, another set of investment bankers and company managers who could be argued to have dressed a prospectus up with overly ambitious numbers....

Still not holding.

Hi Ves,

Given what you said, would I be right to assume you were interested in buying some of the stock at some point or have I misread what you stated? Also don't you run the risk of being taken to court for defamation (if the company wanted to)?, or are you allowed to say such things on a website like this without them being able to do that?

The stock did drop today by just over 15%, with its highest ever daily volume - even greater than its opening day on 16th June this year. The Board expects the fully franked interim dividend for the half year to be unaffected.

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But then their vision ahead now looks a bit blurred...

​

 

[Ves]

Hi piggybank,

I might be interested at some point, but price and the risks I outlined would have to have a great trade off.

I don't think we are there yet. I'd probably wait for the next full year report at least since it's still a newly listed company.

Not sure I can be taken to court on defamation, but it is true that the prospectus forecasts definitely weren't met. No where near it. Happens all too much IMO.

 

[KnowThePast]

Hi Ves,

Your initial post made me go look at the company, which I've done prior to the downgrade.

I've noted their changing business model, no clear differentiation, huge debt prior to IPO, tax benefit which made profit look bigger in 2014, negative OCF - depreciation and desire for acquisitions.

And so, without a competitive advange, or signs of great management or capital allocation, I thought this is a business that I wouldn't expect to achieve a long term EBITDA margin of over 8%. It would also require a higher than usual margin of safety.

Plugging those numbers in gave me a valuation so much higher than the current market cap, I was sure I made a typo. I then looked up announcements, and saw the update, which, while bad, actually predicts roughly the numbers that I had in the valuation anyway.

I am sure I am missing something obvious - why is it at this valuation? It's not the best company out there and is in a tough industry, but there's no debt, it is profitable, no major concerns from what I quickly researched.

 

[daz1982]

Bump anyone having a look at this one recently?

 

[Adam___14]

Its well below book value per share at 0.42. Although if you discount goodwill & intangible assets form equity and divide by shares outstanding, you get 30 cents a share compared to the current market price of 39 cents per share. You can almost buy par value the net tangible assets & have the business for free.

Ive taken current sales and multiplied by the average EBIT margin for the past 4 years which is 2.3%, giving an adjusted EBIT of 6,010,993. I discounted that figure using a 25% tax rate given I think its best to use the the official rate, but made a slight discount given PAS doesn't seem to every have to pay the flat 30% rate.

Given depreciation & amortization is an accounting adjustment, not reflection of true cash, i added back the average dep & amor then subtracted average net capex. Historically capex and depreciation should match. If Capex far exceeds depreciation, then the company is expanding. PAS is obviously not a growth company. Whilst if depreciation exceeds net capex, then the company is not restoring assets. As you can see, both net capex & dep & amor are similar, which showcases management are restoring assets necessary for ongoing operations.

This gives an adjusted cash flow figure of 4,738,845 (I ignore interest because I will divide this figure by equity + debt to to find the historical rate of return, & interest payments are collected by debt holders.

The average ROIC is 3.4%. I will use this as the constant growth rate for a discounted cash flow.

The discount rate used is 10%, the long term growth rate is 2.8% (GDP). Im using the terminal value approach, and then adding net assets & subtracting long term debt. As PAS has strong net current assets & no debt, the final figure is higher than the terminal value. Divide by shares outstanding to give a present value based on future cash flows, & as you can see for the next 5 years, with a 3.4% compounding growth rate, the projection offers a implied 17% annual return for 5 years based on the current 0.39 market price.

The danger here is, the terminal value approach assumes PAS will operate forever. Which is clearly not the case (it might not even be in business in 10 years time). Amazon is the looming threat. PAS could see declines in revenues, or face pricing pressure due to increased competition. However the EBIT margin used was only 2.3% which is very conservative, whilst PAS has increased revenues gradually year on year.

Morningstar has a 5 star price (highest rating of value it gives) at 30 cents a share.

I happen to agree.

I placing a limit order for 35 cents a share. As at this price, an implied 21% annual return is offered over the next 5 years. Whilst the margin of safety is the fact Net tangible assets P/S is 30 cents.

 

[Dona Ferentes]

Gone

Tough retail conditions that have persisted for years and accelerated during the coronavirus pandemic have claimed another victim with PAS Group placed into voluntary administration.

The ASX-listed PAS Group owns a portfolio of fashion brands including Black Pepper, Review and Yarra Trail, and has been struggling for years.

In a statement to the ASX it said it had entered voluntary administration, with the Group’s Board of Directors appointing PwC partners Stephen Longley, David McEvoy, and Martin Ford as voluntary administrators.

“While the Board is of the view that the company is solvent, given the issues as a result of unfavourable financial market conditions, the COVID-19 crisis and the challenges of restructuring in that environment, it felt that Administration was the best way to affect change while protecting all stakeholders,” the company said.

 

[System]

On February 8th, 2021, The PAS Group Limited (PGR) was removed from the ASX's Official List in accordance with Listing Rule 17.11, following completion of the transfer of shares in PGR to PAS Group International Pty Ltd under an implementation deed pursuant to Section 444GA of the Corporations Act.