Three fallen angels: can their share prices soar again?

We are in an unprecedented time when many of the companies that have been in the S&P/ASX200 Index, but whose share prices have dropped and are now actually small caps. Under the Radar defines small caps as companies with market valuations of less than $600m. These include owners of brands that you are familiar with. Under the Radar is looking closely at quite a number of these “fallen angels” or what we prefer to term “accidental tourists” to work out whether they are buying opportunities.

These companies all have highly recognisable brands, which is the focus of our hunt to find out whether these stocks can leverage their brand once again and make current investors big profits.

Stocks I’m talking about don’t need introductions and include Myer (MYR), Seven West Media (SWM), Kogan (KGN), City Chic (CCX) and Kathmandu Holdings (KMD).

Can they make their way back to the big end of town, or are they value traps? We’ve already made big profits from Kogan, so we’ve been off to a flying start. In this article we look at three such companies and examine whether they can withstand COVID-19 and generate profit growth into the future.

One of the key factors is their leverage to digital, or online retail. This is obvious with Kogan, which has no physical stores. City Chic also has an enviable online presence. But money can be made from companies that are transitioning their business from bricks and mortar to online. One is outdoor activities retailer Kathmandu; another is Accent Group (AX1) the owner of Athletes Foot, Hype DC and Platypus, which last week announced it’s re-evaluating the size of its physical store network.

This is a market to make profits from stock specific fundamental analysis, which isn’t possible from simply buying market index-linked funds such as ETFs.

City Chic (CCX:ASX)

Women’s apparel retailer

City Chic has been a remarkable retailing success story, having risen like a phoenix out of Specialty Fashion, which sold off most of its brands to NoniB (NBL) in late 2018. After reporting an impressive 1H20 result that saw shares in the niche apparel retailer climb close to $3.60 just prior to the global outbreak of COVID-19. CCX then briefly traded below $1 and have bounced from $1.50 level in early April when we last covered it, but it’s still in the accidental tourist category.

Most important City Chic’s online business continues to operate. It’s been the key driver of the group’s renaissance, with its low cost base and skew to the US (80% of sales).

The balance sheet is sound but due to the rapidly evolving coronavirus we assume no final dividend. No interim was paid either. The company has a lot of funding capacity with a $35m debt facility (expiring February 2023) and minimal net debt ($2.6m) at the end of December comprising $14.9m cash and $17.5m debt. Including lease liabilities of $34.7m, leverage was about 1.4 times. We note that debt covenants are undisclosed and City Chic was in a much stronger position at 30 June 2019 when it had net cash of $23.2m which helped fund the US$16.5m acquisition of US e-tailer Avenue Stores in October. That said Avenue Stores has increased the groups’ online exposure, which is positive.

Radar Rating: We wouldn’t be chasing this stock because of the depressed economic conditions, but the company is among the best positioned to take advantage of the accelerated online trend.