Fantastic Furniture no match for Nick Scali, investors say

The owner of homewares chain Fantastic Furniture will have to accept a discount price and possibly retain a sizeable ongoing stake if it proceeds with plans for an initial public offering, fund managers say.

Fantastic, which is owned by Greenlit Brands, formerly known as Steinhoff Asia Pacific, kicked off a non-deal roadshow for potential investors this week and is hoping to list before Christmas, four years after Steinhoff International acquired the retailer through a $361 million scheme of arrangement.

Sources said Fantastic was a "very different business" after lifting online sales to almost 30 per cent of total sales, rebranding 80-odd stores, improving the quality of its products and growing sales to about $600 million.

Fund managers said Fantastic served an important need in the Australian market but from an investment perspective it was no match for rivals Nick Scali, Harvey Norman or fast-growing online homewares retailer Temple & Webster.

They said Fantastic would have to be offered at a discount to Nick Scali, which is trading at around 12 times forward earnings, and had no hope of fetching a multiple as high as Temple & Webster, which is trading around 60 times, despite its ambitions to emulate overseas retailers such as Williams Sonoma and lift online penetration to about 50 per cent of sales.

"Fantastic would have to be offered at a significant discount to Nick Scali to attract serious attention," said Adrian Ezquerro, head of investments at Clime Asset Management.

"Nick Scali is one of the best retail operators in the country," Mr Ezquerro said, citing the retailer's long history of profitable growth, its premium market position, strong family ownership, high margins, low-risk ordering system and attractive dividend yield.

"Nick Scali is still run on a family ownership model – Fantastic has been on the ASX and been taken off and [is coming back], so it has more of a chequered corporate history.

"For all those reasons, we're much more comfortable sticking with a quality business we know."

Other fund managers said they would judge Fantastic on its merits when they met chief executive Kieron Ritchard, a former Compass Group and YUM! Brands executive, and chief financial officer Carmen Elliot, a former Woolworths finance executive, later this week.

Like Harvey Norman, Nick Scali, Temple & Webster and Adairs, Fantastic has benefited from a boom in furniture and homewares sales as consumers cocoon at home and redirect spending on travel and restaurants to new sofas, dining suites and carpets. Fantastic's sales grew 33 per cent between March and July, year on year, according to information sent to fund managers, with online sales soaring 91 per cent.

However, fund managers say the sector sales boom in unsustainable and Greenlit Brands, which also owns Freedom Furniture, is attempting to sell Fantastic at an opportune time. Greenlit sold Harris Scarfe and Best & Less late last year to reduce debt while attempting to distance itself from its troubled parent.

"You take every opportunity on its merits but there is a perception that Greenlit are motivated sellers," said Airlie Funds Management portfolio manager Matt Williams.

"The fourth quarter of 2020 and the first few months of 2021 have been pretty extraordinary [for homewares retailers] but we do not expect those figures to continue; we expect a normalisation at some point."

Other fund managers said they would take a good look at Fantastic's accounts, given Steinhoff's past accounting irregularities, and said Greenlit Brands may have to retain a sizeable stake after an IPO to give new investors comfort.

"Greenlit would have to retain a stake for some time … they couldn't take too much cash out, otherwise you'd have to be sceptical," said one fund manager who declined to be named. "For the risks people are taking on, it has to be a low multiple."