Holdsport interim results, building for the future

15-OCT-13

Holdsport. This is a tricky investment theme, but one that I think has legs, no pun intended. For all of the reasons that we have mentioned above, more people are starting to take their health seriously as the best alternative to living a healthy life. It is far better to prevent the diseases than to battle them. Think about when you walk into the pharmacy, there are rows of health supplements and equally slimming products. We all want to be in shape and recognise that by being out there participating in sports and related activities that we can live a longer and healthier life. Truth. Sporting apparel and equipment is a much more competitive market than it used to be, there are loads of choices.


But at the same time people do not mind wearing the big brand names in apparel as fashion items, Nike, Adidas, Puma, Under Armour, Reebok, even Billabong and Quiksilver in the watersports arena, and then there are the niche brands like The North Face. Manchester United (Nike) and Real Madrid (Adidas) sell 1.4 million shirts apiece each year. Wow. Someone needs to sell them, as well as the other football teams that we love so much, FC Barcelona, Chelsea FC, Liverpool, Arsenal, AC Milan, Inter Milan, Bayern Munich and the list goes on, I apologise if you missed your football team, I did not mean to.


So what is it exactly that Holdsport does? Well, they have three businesses, the biggest by a country mile is the Sportsmans Warehouse brand, which sells approximately 1 billion Rand worth of sporting equipment and apparel each and every year. Or roughly 2.739 million Rand worth of sporting equipment each and every day (if it were open all day long, every day of the year), it is not really that much if you think about it. Their other major business is the smaller Outdoor Warehouse, where you can buy your camping and related equipment. This division as of the half year results was responsible for 22.5 percent of group sales (141.9 million out of 630.9 million ZAR in total), whilst the bigger Sportsmans Warehouse constituted 72.6 percent of group sales. The third business, is the niche sporting equipment, under the First Ascent brand, and includes the recently acquired smaller CapeStorm. Performance brands for outdoor sports, think mountain biking, trail running, hiking, paddling, even skiing. That division is tiny and accounts for only 4.9 percent of total sales, or 30.9 million ZAR.

There are only 35 Sportsmans Warehouse outlets, 19 Outdoor Warehouse locations, whilst the performance brands have quite a good quality online presence. Holdsport do not own any of their properties, they lease them all, I suspect that this gives them the flexibility that they need to be in the locations that they want. They have however recently built a distribution centre, a 50:50 with Redefine properties, a fairly sizeable transaction for Holdsport, having invested over 72 million ZAR (including in this half currently) on warehousing in the Cape for their retail distribution centre and more recently (September this year, that is last month) the company started constructing a smaller warehouse for their performance brands. Right next door to the finished retail distribution centre.


The weakening Rand is not necessarily positive for their business, nor is it for their suppliers, because the knock on impact to your pocket. You and I will have to pay more for our favourite sporting goods, apparel and the like. But as a sporting nation with wonderful outdoor weather, a growing middle class and a relatively small market with lots of potential, I do think that the pretty low growth rates seen thus far will turn. The company has compelling investment fundamentals, the stock trades on a 12 multiple with a yield of around 4.9 percent (forward). Potentially cheap for someone to take out, although if you cast your mind back, Massmart tried and failed at the competitions authority hurdle. So it would have to be an outsider. But I suspect that is not what the management are thinking, they only recently brought this back to market. Kevin Hodgson, the CEO is a significant shareholder, as much as 12.5 percent. Another reason to hold them, management (and Coronation with odd 25 percent) are in waist deep. Accumulate on weakness!