Sports Direct (LSE: SPD) is the company investors love to hate. Or should I say investors love to hate the group’s CEO and founder Mike Ashley.
Personally, I am willing to overlook Ashley’s brash way of doing business because it seems to be working. He has created a retail empire with Sports Direct and, if anyone is going to succeed turning around the stable of struggling businesses the company has recently acquired, it will be him.
Buy, build, sell
Buying assets at distressed prices has been Ashley’s playbook for years. Many of the brands owned and stocked in Sports Direct’s stores were acquired at distressed prices but were given new life under the group’s umbrella.
Take Dunlop for example. Sports Direct acquired Dunlop Slazenger for around £40m in 2004, which gave it exclusive rights to the Dunlop, Slazenger and Carlton brands. After more than a decade of ownership, Sports Direct sold Dunlop Brands to Japan’s Sumitomo Rubber for £112m in 2016 an annual return, according to my calculations, of approximately 9% excluding any profits earned.
Ashley’s buy-cheap-and-build model has enabled him to grow Sports Direct into a global retail giant.
For 2019, City analysts believe it can achieve sales of £3.7bn and a net profit of £86m. This profit figure is significantly below where the group was in 2017 (£229m) because the business is spending tens of millions of pounds on new deals, such as the acquisitions of House of Fraser and Evans Cycles.
Ashley seems to believe he’s the only person who can turn these businesses around and rescue the UK high street, but many analysts are sceptical.
Only time will tell if Ashley is doing the right thing. But as he owns around two-thirds of the company’s shares, he has more to lose than most and is highly incentivised to achieve the best result for investors. That’s why I think it could be worth backing him.
A new deal
Yesterday, Sports Direct announced yet another new deal. The firm wants to buy home shopping company Findel (LSE: FDL) for 161p per share, or £139m in total.
Sports Direct already owns 36.8% of Findel, so it was really only a matter of time before the company made an official offer for its smaller peer. However, Findel’s management immediately rejected the offer saying that it “significantly undervalues Findel and its future prospects.” I agree with them. Only a few weeks ago, shares in Findel were dealing above 170p.
I think this could be an excellent opportunity for investors to snap up shares in Findel as it’s most likely Ashley will be forced to up his offer.
Right now, the stock is changing hands at a forward P/E of just 6.2 times forward earnings and while Ashley likes to buy distressed assets, this multiple appears outrageously low for a profitable, growing business.
City analysts believe net profit will increase 30% over the next two years to £24.5m. On this basis, I reckon in the best case scenario, the shares should command a low single-digit valuation multiple, implying a price of at least 250p per share, or 55% above Ashley’s current offer.
Of course, this is only speculation. But, as I said above, I think it’s likely Sports Direct will ultimately acquire Findel. The only question is when?
