I like ADH, I do, but not in todays external climate and the Mocka Goodwill write off which is surely coming.
Here are my 8 reasons why I have retreated to the sidelines awaiting the recessionary pressures to abate.
(1) Inflationary effects on domestic household budgets
(2) Higher costs of servicing household interest burden driven by (a) increasing interest rates to date and likely continuing into the future (b) massive interest rate increases by the rollover of previously fixed rates at around 3% to close to 6% - massively increasing over the next six months (c) Strict APRA rules on ensuring new loans be stress proofed at 3% over current home loans rates of around 6% will restrict the volume and quantum of future loans
(3) Falling domestic dwelling construction (April 2023 down 8.1%) and liquidation problems in this industry presently. Adairs is a beneficiary of the need for hard and soft furnishings in these new dwellings
(4) Effective increase in wages by 6.25% by Fair Work Commission (June 2023) will push ADH wages as a percentage of sales from 19.4% to 20.6%. Sure I do understand that Ronan will look for greater productivity.
(5) Current hedging at around 72c USD will run out end of year and the direction of the AUD/USD is likely down – currently 66c
(6) The diabolical performance of Mocka – a likely FY23 EBIT of ZERO on an asset with a book value for goodwill and brand of around $72m – the results get worse each six months and the company has now had 4 half yearly time periods to make an improvement, instead it steadily gets worse.
(7) A total write off of the Mocka goodwill will take the net debt as a percentage of net debt plus equity to around 40%. Might raise the banks risk level and thus interest rate to be assessed on the $75m debt facility due to be renewed in July 2023
(8) Very likely a partial to significant Mocka Goodwill and brand acquisition write off in FY23 or FY24 (discussions with auditors probably happening right now as already foreshadowed in the fine print to the 1HFY23 results as follows:
“The cash flow forecasts assumed for the FY23 year reflect a substantial reduction on those applied in the previous impairment test at 26 June 2022 given the actual operating performance of Mocka for…
