Giving some background context into my first post on this blog (thanks Samuel for setting this up), I have always been interested in looking at stocks and their direction but I never really got around to doing a financial model or performing a more rigorous analysis. I think the lack of due diligence into the stocks speaks a lot into my investment performance to date, which has been lagging market indices thus far. I hope that through this process of doing up a financial model and an equity research report, I can instill more clarity into my thought process and better ready myself for a possible investment career.
With regards to the company Tailored Brands, I was introduced to this company by a friend, Hong Yi, who told me he was looking at this stock because it was very undervalued. I decided to look further into this as I felt that this was a company with a business model that was easy to understand since it was focused mainly in apparel retail, unlike conglomerates. Upon looking further, I discovered that this was an unique company. It had a very high debt portion in its capital structure, which caused its book value to be negative. Yet, it was highly cash generative, generating about ~US$300m of operational cash flow a year, which could be used to pay down its debt easily. As such, using a DCF model to value this stock would lead to a lofty valuation since cost of capital is pushed down greatly.
In addition, based on the book "Beating the Street" by Peter Lynch, I also tried to devise a comparables method based on calculating the EV per square foot retail space metric to value Tailored Brands. This led to a target price of $31.27, which implies a forward P/E of 15.7x off 2019E diluted EPS. To account for market conditions, I decided to assign a conservative multiple of 10x to 2019E EPS, in-line with historical P/E yet still providing considerable upside of 167% to the current share price.
Even as I completed my research report yesterday night, the stock dropped another 10% yesterday to close at US$6.66. At this price, I believe that this value is indeed emerging for this stock. The dividend yield currently stands at an attractive 10.8%, which I believe that the company will be able to continue to sustain given its current operational cash flow generation and the fact that it is nearing its target to pay down debt to a multiple of 3x EBITDA. Singaporean investors should take note that there is a 30% dividend withholding tax on US-listed stocks, which should translate to a dividend yield of approximately 6-7%.
I would really appreciate any comments on my research report. Thanks for reading! The link to the report PDF can be found below. I look forward to updating this report on June 12, 2019 when the company conducts its FY2019 Q1 earnings call.
ER Report
ER Report
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