Do Day Dream: Ugly Is Only Skin-Deep
Missed out on Innature's 30% gain since my May 2021 report? No worries... here's another one!
This kind of optionality that doesn’t get priced in by markets are one of the key signs I look out for when investing in EMs - especially when considering the relative hyper-volatility of the business environments they tend to occupy (vs developed markets), where fundamentals can turn on a dime.
The company has experienced a string of non-recurring risk events (both idiosyncratic and systematic) since its IPO in 2017 - which has contributed to the -80% decline in its share price since then.
The company has 66% of its Total Assets represented by Cash & cash equivalents (73% of Total Equity) - and has been paying a normalized 3% dividend yield at current share prices, despite negative FCF over the past few years.
At a current PE of 33x (PE ex-cash: 13x) based on FY20 earnings, and a peak PE of 17x (PE ex-cash: 4x) based on FY17 earnings - the market is basically assigning a fair valuation with reference to the 25x industry average PE for the Branded Retail sector; but severely underestimates built-in optionality.
DDD’s titanic cash balance (60% of their current market capitalization) could be turned into the business equivalent of a nuclear missile in terms of marketing and distribution firepower when penetrating a new market.
The thesis for this stock is nearly identical to the one I made for Innature in May 2021 (whose share price has gained 30% since then) - with significantly better odds.
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In May, I wrote an article about one of my favorite stock picks at the time - Innature Berhad, the listed Malaysian entity of Body Shop. You can read my report about them below, and here is how its shares have performed since then & YTD:
At the time, Innature’s mostly brick-and-mortar (B&M) Body Shop stores in Malaysia had been under lockdown for most of the past 12 months, and was understandably experiencing a down cycle. However, the company had a very healthy balance sheet and remained profitable throughout the pandemic - as expected from a Body Shop business in the Branded Retail sector.
The basic idea behind my thesis in May was that Innature - being a branded retail business - would usually trade at between 25x - 30x PE, based on industry average valuations for the branded retail sector. If the company could survive the pandemic and return to normal earnings capacity, it was trading at just around a normalized PE of 15x at the time - implying roughly 60% upside for almost negligible risk. Furthermore, the normalized dividend yield at the time was approximately 5% based on dividends paid prior to the pandemic. So for almost no risk tradeoff, you were basically being paid a 5% yield to sit on your hands and wait for the next B&M retail upcycle - which has arguably already played out halfway by now.
However, fret not if you’ve missed that gravy train - for today, it is my great pleasure to share with you another similar stock in the branded retail industry - which bears a similar risk:reward profile. This time we’re going to Thailand, the Land of Smiles.
Do Day Dream (DDD) is primarily in the skincare business. As we can see from the table above (ignore 2020’s column due to covid), between 50-66% of their revenue comes from the Skincare segment alone; while more than 77% of their revenue is derived from their Skincare, Cleansing & Giftset segments cumulatively.
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