Where did you see Brian Hill hold 18% stake? On Tikr and interactivebroker, I dont see this. Only Simply wall st is showing Brian Hill owns 18% stake. How to know which is correct?
Thank you for the analysis and for sharing it. It's thorough and identifies drivers of growth correctly. It's maybe also worth considering that they have some 600 million in capital leases (or 4.5 per share). These are debt equivalents I would take out of your estimate of enterprise value (leases as debt have prior rights compared to common equity). Regarding the terminal multiple, based on data I collected, over 2006 – 2022 value between 10 and 12 (10.8 to be exact) seems like a fair estimate. Still the same (https://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html) data would suggest cost of capital of 8% so those two level out in a way 🙂 Keep up the good work! 🍀
Hi, Thanks for the detailed comments and reading through this lengthy report. I appreciate it. So on the leases, my EBITDA and my terminal value is adjusted for rent (IFRS 16 adjustment). That is I don't add back the entire D&A in EBITDA - but just the D&A on PP&E leaving in the right to use asset depreciation. So I've considered leases already. The other way to do it is what you pointed out. Add back entire D&A (including ROU assets) and then takes leases as debt. Either way is fine. I like my method because it gives me a better since of ongoing cash flow. Like you mentioned, discount rate and terminal multiple depend on each investor and analyst and their comfort levels. I take 10% discount rate throughout all my DCFs, because it helps be do an apples to apples comparison between opportunity available to me (and the margin of safety). To the extent possible I adjusted cash flows for any perceived risks. Not that CAPM is a bad methodology. It is just my choice. Terminal multiple is also very subjective. I think 5 years from now Aritzia will have a growth avenue in Europe and China (and broader Asia / Australia). So still think 13X multiple is reasonable. Also, I should the sensitivity precisely for that reason. It depends on what the investor is comfortable assuming. Thanks again for reading.
Appreciate the effort here and the hard work put in. Question on the actual calculation though as I come out with drastically different valuation and I believe it's how the terminal value is being calculated.
When doing the terminal value for a a DCF, you just take the FCF or your $433 in your terminal year divided by your discount rate less rate of growth which you then present value back. This would give $6,185M for the terminal value which is then discounted back to $3,840M using your 10% discount rate for 5 years.
You don't normally do an EBITDA mutiple in 5 years time on the exit rate. Is this a different valuation method?
When calculating the terminal value like this, the share price goes to $40.93/share which actually is pretty close to where the stock is now.
Thanks for replying and reading. I appreciate it. What you've mentioned is the Gordon growth method of modelling the terminal value and what I've done here is the exit EBITDA multiple method. Both methods are well know and accepted. However, I feel Gordon growth is suitable if the company will have no runway or little avenues for growth after 5 years. Say something like a Reitmans today which is closing down stores. At only 150 stores in FY2027 I don't assume that Aritzia's growth will be stagnant to 3% thereafter. I think globally anywhere between 300 to 500 stores might be the north star for the company. There will likely be a interim mid growth period (10%ish year on year) and then tapering down to probably a 3% period much later. I simply assume a lower EBITDA multiple to factor that it. Another way of thinking about this, is that how much gordon growth terminal growth rate is implied by my EBITDA multiple method - it is 5.3%.
Hi, Good research, Thank you for sharing.
Where did you see Brian Hill hold 18% stake? On Tikr and interactivebroker, I dont see this. Only Simply wall st is showing Brian Hill owns 18% stake. How to know which is correct?
Thank you for the analysis and for sharing it. It's thorough and identifies drivers of growth correctly. It's maybe also worth considering that they have some 600 million in capital leases (or 4.5 per share). These are debt equivalents I would take out of your estimate of enterprise value (leases as debt have prior rights compared to common equity). Regarding the terminal multiple, based on data I collected, over 2006 – 2022 value between 10 and 12 (10.8 to be exact) seems like a fair estimate. Still the same (https://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html) data would suggest cost of capital of 8% so those two level out in a way 🙂 Keep up the good work! 🍀
Hi, Thanks for the detailed comments and reading through this lengthy report. I appreciate it. So on the leases, my EBITDA and my terminal value is adjusted for rent (IFRS 16 adjustment). That is I don't add back the entire D&A in EBITDA - but just the D&A on PP&E leaving in the right to use asset depreciation. So I've considered leases already. The other way to do it is what you pointed out. Add back entire D&A (including ROU assets) and then takes leases as debt. Either way is fine. I like my method because it gives me a better since of ongoing cash flow. Like you mentioned, discount rate and terminal multiple depend on each investor and analyst and their comfort levels. I take 10% discount rate throughout all my DCFs, because it helps be do an apples to apples comparison between opportunity available to me (and the margin of safety). To the extent possible I adjusted cash flows for any perceived risks. Not that CAPM is a bad methodology. It is just my choice. Terminal multiple is also very subjective. I think 5 years from now Aritzia will have a growth avenue in Europe and China (and broader Asia / Australia). So still think 13X multiple is reasonable. Also, I should the sensitivity precisely for that reason. It depends on what the investor is comfortable assuming. Thanks again for reading.
Appreciate the effort here and the hard work put in. Question on the actual calculation though as I come out with drastically different valuation and I believe it's how the terminal value is being calculated.
When doing the terminal value for a a DCF, you just take the FCF or your $433 in your terminal year divided by your discount rate less rate of growth which you then present value back. This would give $6,185M for the terminal value which is then discounted back to $3,840M using your 10% discount rate for 5 years.
You don't normally do an EBITDA mutiple in 5 years time on the exit rate. Is this a different valuation method?
When calculating the terminal value like this, the share price goes to $40.93/share which actually is pretty close to where the stock is now.
Thanks for replying and reading. I appreciate it. What you've mentioned is the Gordon growth method of modelling the terminal value and what I've done here is the exit EBITDA multiple method. Both methods are well know and accepted. However, I feel Gordon growth is suitable if the company will have no runway or little avenues for growth after 5 years. Say something like a Reitmans today which is closing down stores. At only 150 stores in FY2027 I don't assume that Aritzia's growth will be stagnant to 3% thereafter. I think globally anywhere between 300 to 500 stores might be the north star for the company. There will likely be a interim mid growth period (10%ish year on year) and then tapering down to probably a 3% period much later. I simply assume a lower EBITDA multiple to factor that it. Another way of thinking about this, is that how much gordon growth terminal growth rate is implied by my EBITDA multiple method - it is 5.3%.