Alex Duys, chief investment officer at Umthombo Wealth, says Truworths is very cheap at current levels and considering its attractive dividend yield, it is a strong buy.
Truworths is an investment holding company founded in 1917. It has 794 retail stores across Africa and 129 stores in the UK.
It showed strong organic growth in the twentieth century and was listed on the JSE and Namibian stock exchanges in 1998.
Over the last twenty years, Truworths acquired numerous businesses to bolster growth, including:
- Young Designers Emporium in 2003
- Uzzi in 2006
- Earthaddict in 2015
- Earthchild in 2015
- Naartjie in 2015
- Loads of Living in 2017
The group’s main operating companies are Truworths and Office Holdings, which primarily operate in the UK.
Duys is upbeat about Truworths’ prospects as an investment because of its 7.3% dividend yield.
He says the stock may have muted growth in the medium term, but the company has strong cash generation capabilities enabling the continuation of dividend payments.
Duys highlighted the company’s current 48% return on equity as a measure of the group’s strong performance.
The graph below shows Truworths’ dividend payments since 2016. The dividends have been declining over the period but have picked up strong from their low point in 2021.
Truworths has a sustainable dividend payout ratio of 53% of its earnings. The increase in dividends is a reassuring sight and is attributable to the group’s strong financial performance during the 2021/22 financial period.
Truworths’ net income margin compared favourably with two of its peers – Mr Price and The Foschini Group.
Truworths has a net income margin of 17.06%, much better than Mr Price’s 12.22% and The Foschini Group’s 6.71%.
One area of slight concern is its debt. Truworths’ debt-to-equity ratio increased from 0.64 to 0.83, and its current ratio – current asset relative to current liabilities – worsened from 1.75 to 1.68.
These levels are still in line with its industry peers and don’t signal major debt issues, but they should be monitored to prevent further worsening.
If Truworths can continue delivering financial performance in line with its latest results, the debt levels could easily be lowered.
The latest price-to-earnings (P/E) ratios in the South African clothing retailer segment show that Truworths is undervalued relative to its industry peers.
Truworths has a P/E ratio of 7.52, significantly lower than The Foschini Group’s 15.22 and Mr Price’s 15.12.
It shows that investors pay less per unit earnings in Truworths than with its industry peers, which may signal a good buying opportunity.