Dusk Group smells >40% undervalued: Here’s why it may rebound

Nick Sundich Nick Sundich, April 4, 2023

Dusk Group (ASX:DSK) purports to be Australia’s favourite home fragrance seller. Investors haven’t been sharing the love for it as of late, but we think that could be about to change.

 

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Who is Dusk Group?

Dusk sells home fragrance products such as candles, diffusers, air purifiers and essential oils.

It traces its origins back to 2000 when Perth businessman David Stratton opened the first store. It was acquired by retail conglomerate Brazin in 2004 for just $24m and was sold in 2010 to Catalyst Investment Management and Brett Blundy’s BB Retail Capital.

Dusk Group listed in 2020 at $2 per share, a deal that gave the company a $124.5m market capitalisation (10x P/E). By that time, it had 115 stores across the country.

After a nuanced debut, shares rose as high as $4 in mid-2021, but it has been all downhill since.

 

Dusk Group (ASX:DSK) share price chart, log scale (Source: TradingView)

 

Why did Dusk Group rise and fall?

Dusk Group’s share price rose because their sales did substantially during the pandemic. People stuck at home opted to spend their money on homewares.

The company’s sales increased by over 47% and it more than doubled its post-tax profit from $9.5m to $21.9m.

Also helping the company was Wilson Asset Management accumulating a substantial position in the company.

But as the economy returned to normal, so did this company’s sales. Adding insult to injury, marketing and freight costs all added up as inflation spiked to 4-decade highs.

In FY22, its sales declined by 7% to $138.4m, even though this was 37% higher than FY20. Like for like sales declined 10.5% and Dusk’s NPAT declined by 31% to $18.4m.

1HY23 continued the decline in sales (especially online sales) and margins.

At the release of these results, Dusk Group reported that total sales for the first 7 weeks of 2HY23 were 3% lower compared to the prior corresponding period and it declined to give FY23 earnings guidance.

It wasn’t all doom and gloom, however. The company is a dividend payer, paying an interim dividend of 8c per share which was an 8.5% yield on an annualised yield.

And even though growth in its membership program is slowing, it is still growing. It reached 722,000 as at the end of CY22.

 

What does the future hold?

Turning to consensus estimates, growth in revenue is expected in the years to come. FY23 will see <1% growth however, with $139.5m. The future years look stronger with $147.1m in FY24 (up 5.4%) and $157m in FY25 (up 6.8%).

Consensus estimates for DSK’s earnings are less optimistic, not projecting FY22 levels until at least FY27.

And FY23 estimates call for a 25% fall in EBITDA and 27% fall in EPS. FY24 will see just 3% EBITDA growth and 9% EPS growth followed by 13% EBITDA growth and 12% EPS growth in FY25.

Nevertheless, the company’s accounts would remain healthily above its pre-COVID levels in that scenario.

One factor to note making the future uncertain is that long-term CEO Peter King is standing down once a replacement is found.

It will be fascinating to see who is appointed.

 

Valuing DSK Group

DSK is trading at just 6.9x P/E and 4.2x EV/EBITDA for its FY24 consensus estimates.

If DSK was worth 10x P/E at its IPO and deserves to be now, it should be trading at $2.30 per share – a 44% premium to its share price as at intraday on April 3 2023 ($1.60).

Considering the PEG basis, Dusk Group is trading at just 0.8x, indicating it is undervalued relative to its growth.

 

Dusk likely to rebound…

…however two points must be noted.

First, the company may fall further if it performs worse than consensus estimates. Second, it remains to be seen who Dusk Group’s new CEO is and what he or she will do to return the company to growth.

 

 

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