Halfords Plc. operates within the car serving and cycling markets of the specialty retail industry across the U.K., Republic of Ireland and Europe. Halfords presents a high quality business with fantastic business economics, a consistent track record and should be viewed upon as a indefinite holding.
1. Vigilant Leadership
Total Shareholder returns:
Source: Annual Reports
- Annual Bonuses – Maximum available is 150% of base salary.
- Based upon – Revenue growth (25%) and Operating profit (75%)
2. Long Term Prospects
Halfords operations include:
- Motoring Market
- Cycling Market
- Motoring Market
- Division 1 – Car parts, accessories, consumables and car technology.
- D1 expected annual compounded growth 3% approximately.
- Division 2 – Car servicing and aftercare
- D2 expected annual compounded growth 2% approximately.
2. Cycling Market
- Division 3 – Retail Bikes
- Division 4 – Parts, accessories and clothing
- Division 5 – Cycle repair
Technological Advancement Proof:
Halfords themselves answer this question, “Cars are becoming more complex, with greater variety of models and enhanced technology making it more difficult or even impossible for people to “Do it Yourself”.
Combined with a change in needs from increasingly time- poor consumers, is driving a “Do It For Me” trend.
- Key investments may fail to produce significant shareholder returns
- Failure to compete with competitors on areas including price, product range, quality, service and trustworthiness.
- Supply chain disruption (outside the UK supply chain)
- Failure to protect the group brand and reputation
Solutions to risks:
- Halfords has delegated authorities processes to approve of significant investments, including reviews by an Investment Committee and the Board.
- Significant investment programs allows Haldfords to improve the service provided to customers by improving the quality of stores, IT infrastructure, training, customer knowledge and online presence. Excellent service will ensure differentiation from competitors.
- Understanding of the local culture, market regulations and risks, whilst maintaining very close relationships with both suppliers and shippers to ensure that disruption to production and supply are managed appropriately. Also Halfords works with suppliers in a number of territories to reduce the risks of disruption.
- Halfords constantly seeks to enhance its position as the store or centre of first choice in each of the markets that it serves.
3. Stable and Understandable Business Economics
Understandable business economics
- Car servicing (since 2010 with the acquisition of Nationwide Autocentres)
Revenue streams & Recognition:
* Retail (leisure, cycling & equipment). * Car enchantment. * Car servicing (Autocentres).
Retail revenue recognition – When significant risks and rewards of ownership of the goods have passed on to the buyer. Delivery – when the customer accpects the delivery.
Car serving revenue recognition – At the point of their service being rendered.
Barriers to entry:
* Strong brand image * Knowledge & expertise in market * Economies of scale due to external supply chain * High&consistent Return on Equity and Return on Invested capital * First mover in most markets
Rank in Indsutry:
- Leading retailer in car serving and cycling retail
Competitive Advantages (Moats!!!):
- Leading retailer of automotive & cycling products (UK).
- Stickiness – Brand loyalty from customers whom are willing to pay a premium for higher quality.
- Strong defensive characteristics (high barriers to entry & minimal debt)
- Immune to external environment (grew through 2001 & 08)
- Successful business model for over 100 years !
Self funded growth:
* Retained Earnings = £260 Million * Profits = £64 Million * Share capital = £ 2 Million * Net borrowings = £ 60 Million * Free cash Flow = £ 58 Million
* Free cash flow (2016) = £ 58 Million * 10 Year Ave Free cash Flow = £ 67 Million
- Halfords Free cash flow has been positive over the last 10 years + !
- Motoring Market
- Current combined market value of £ 16 Billion.
- Number of cars and milage clocked continues to increase over previous years.
- In-car cameras, child seats and other similar products provide innovative future products for Halfords to dominate within.
2. Cycling Market
- Current combined market value of £ 1.5 Billion
- Growth of 6-8% in the past 3 years per annum.
- Expected future growth around 3-5% per annum (long-term).
- Continued government investment into cycling promotion and infrastructure (especially in London)
- Cyclist participation in the UK is still relatively low, thus room for growth and expansion of Halfords customer base as the population increases in activity and health promotion.
- Types of cyclists include: * Leisure, commuting and fitness. Thus, Halfords has the opportunity to specialise further in each type.
4. Price to Valuation
Holistic mental model valuation:
*See Long term prospects for information on divisions. (Persistent Products, above)
From computing a discounted cash flow analysis and earnings analysis on the Future cash flows of Halfords Plc. And discounting them back to today’s present value using a 7% discount rate to be Intrinsically valued between £5 – £8 per share. Which is £ 990 Million – £ 1.5 Billion for the entire company. Halfords current market share and the total value of each sector was also taken into consideration in this valuation.
Valuation Metrics: (Based on a current market price of £3.50)
* Price/Earnings = 10 * Price/Book Value = 1.9 * Price/Sales = 0.7 * Acquirer’s Multiple = 8.7 = 11.5% operating earnings return
Thank you for reading, I hope you enjoyed this fundamental analysis 🙂
Jordonlee W. Smith