Truworths International (TRU ZA)

Feb 2, 2022 | Stock Picks

SUMMARY

Position:                                         LONG

Upside target:                              R65.50

Recommended stop-loss:           R53.00

Recommendation:                      BUY

 

Analysts:

Peet Serfontein, Thabiso Mamathuba

 

Truworths International is engaged in the retailing of fashion apparel and accessories.

The Truworths International Retail Group incorporates Truworths, Truworths Man, Identity, YDE, Uzzi, Earthaddict, Earthchild, and Naartjie.  The company expanded into the UK a few years ago, with the acquisition of the Office fashion footwear chain.

Truworths is a stable operator with a well-diversified and balanced brand portfolio.  The company has a strong balance sheet, which should be supportive of share buy-backs and more favourable dividend cover.  The group is currently trading at a discount within the broader local apparel retail space.

Technically, an inclining channel pattern makes the share attractive as an investing option.

The price remains above the 200-day simple moving average.  A continuation above the 200-day classifies the long-term trend as bullish.

 

Technical analysis

A bullish crossover occurred when the MACD-line crossed above the MACD-signal line.  This indicates a change in direction to bullish, and acts as a buy trading signal (see the black arrow on the chart).

According to the Coppock curve, upside price momentum supports the bullish trend.  The Coppock curve is a medium- to long-term price momentum indicator used to identify major downturns and upturns.

The recent sideways trajectory of the on-balance volume (OBV) indicator shows that money remains in the share.  The OBV enables traders and investors to make predictions about future price movements based on the share’s previous trading volume.

Our entry range is between R55.00 and R58.50.  Our upside target is set at R65.50 (+15.5% upside potential from current levels).

Time to exit is mid-April 2022 (taking a medium-term stance).  Keep the option open to extend the time exit should the price action unfold sideways, or our profit target be reached in a shorter time.

A price below R53.00 (-6.5% from current levels) is a major concern for downside potential and is recommended as a stop-loss.  This level is close to the lower range of the inclining channel pattern.

Expect some volatility in the price.

 

Long-term fundamental view

Truworths boasts a well-diversified and balanced brand portfolio.  The company is cash flush with net debt reducing by 30% y/y in FY21 to R2.8 billion.

Further efficiency gains and improved productivity from new distribution centres should be positive in the medium term and could allow for growth in the business.

The recent addition of Identity Kids to its stable has been beneficial and should also be positive for sales growth.  Truworths was previously under-represented in the children’s clothing space.

The 1Q22 update was softer, with sales down 1.2%.  Stock shortages may have played a role—which hopefully is a short-term issue.

The debtors book continued to show im-provements and collections remain stable, while credit provisions have normalised.

Downside risks to our fundamental view include concerns over its ageing sourcing model, credit reliance (49% of sales), and high relative price points.

While the UK exposure will have some diversification benefit, it has opened the company up to currency risk and the potential deterioration of the UK economy.