Why this ASX company’s international expansion doesn’t have to follow other’s failures

Will Granger | Airlie Funds Management

Few public company announcements strike as much fear into investors’ hearts as the headline ‘equity raise to fund acquisition and expansion into new overseas market’.

There are countless examples of Australian businesses who have been humbled by their global ambitions: Bunnings’ entry into the UK with Homebase, Boral’s foray into the US with Headwaters or Orora’s (ASX: ORA) recent entry into Europe with Saverglass. During the June quarter, our fears were realised when one of our core holdings, Nick Scali (ASX: NCK), announced its expansion into the UK market with the acquisition of Fabb Furniture.

"The Fabb Furniture business is currently loss-making, with the main attraction being the acquisition of the 21-store footprint, which Nick Scali will spend $27m rebranding and refurbishing."

Fortunately, there are a few reasons why we are much more optimistic about the prospects for Nick Scali’s acquisition. For one, the acquisition itself is a relatively low-cost bet. The Fabb Furniture business is currently loss-making, with the main attraction being the acquisition of the 21-store footprint, which Nick Scali will spend $27m rebranding and refurbishing. The total estimated cost of the venture is $50m – or just ~5% of Nick Scali’s market capitalisation at the time of acquisition. Compare this to Boral’s ~58% dilution for Headwaters or Orora’s ~45% dilution to acquire Saverglass. It’s fair to say that, for Nick Scali, this is far from a ‘bet the farm’ acquisition.

Additionally, management have a demonstrated track record of creating value through acquisition. The company acquired Plush in 2021 for $103m, or just 4x EBITDA. The acquisition made strategic sense, leveraging Nick Scali’s scale in upholstery to materially improve Plush’s gross margins from 54.8% to 62.7%. The playbook for Fabb Furniture is largely the same – refurbish the store network and leverage the Nick Scali supply chain to improve gross margins.

And finally, you have one of Australia’s most talented retailers at the helm in Anthony Scali. While it’s true that he has significantly reduced his shareholding, Anthony still holds ~8% of the company, and his track record for creating value for shareholders over the past 20 years is stellar. The importance of good management in retail is paramount, and in this case, there are few managers you would back more to execute this expansion than Anthony Scali.

If the venture does prove successful, the upside case is obvious; the UK furniture market is twice the size of the Australian market, so there is scope to build a business that one day dwarfs the size of the existing business. For these reasons, Nick Scali remains a core holding in the Airlie Small Companies Fund.

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All prices and analysis at 25 July 2024.  This document was originally published in Livewire Markets on 25 July 2024. This information has been prepared by Airlie Funds Management (ABN 31 120 593 946, AFS Licence 304 301). The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.