Super Retail Group: Strong ROE, Steady Dividends, and Undervalued Potential

Super Retail Group Limited (ASX:SUL), Australia's leading specialty retailer with brands like Supercheap Auto and rebel, has quietly built a compelling case for investors seeking both income and growth. With a robust return on equity (ROE), consistent dividend payouts, and a discounted cash flow (DCF) valuation suggesting it's trading below intrinsic worth, the stock presents an attractive entry point for income-focused investors. Let's dissect the numbers.

ROE: A Solid Foundation for Growth

Super Retail's trailing twelve months (TTM) ROE stands at 16.91%, just shy of its 3-year average of 18.48% but comfortably above its 10-year average of 15.72%. While this figure dipped slightly from 2023's 19.23%, it remains strong compared to peers like Breville Group (14.5%) and Bapcor (-18.15%). Only JB Hi-Fi (28.98%) outperforms it in the sector.

The ROE reflects management's efficiency in deploying equity to generate profit. A 17% ROE signals that every dollar of shareholder equity generates 17 cents in profit annually—a solid return by any standard. While the metric has fluctuated over the past decade, the consistency in recent years underscores operational resilience.

Dividend Discipline: A Reliable Income Stream

Super Retail's dividend history is a hallmark of stability. Over the past five years, the payout ratio (dividends relative to earnings) has remained within 65–81%, ensuring dividends are well-covered by earnings. The final dividend per share has held steady at A$0.87 since 2022, with an interim dividend of A$0.32 paid in April 2025. Combined, this yields a 4.9% dividend yield at current prices—a top quartile return in the Australian retail sector.

Critically, the dividend is fully franked, offering tax advantages to Australian shareholders. While the final dividend for FY2025 was reduced to A$0.37—a temporary adjustment to align with lower earnings—the payout ratio remains 68–69%, ensuring sustainability. Analysts note this reflects prudent management, prioritizing long-term shareholder returns over short-term overreach.

DCF Analysis: Undervalued by 3.5%—Room to Grow

A DCF analysis as of June 2025 estimates SUL's fair value at A$13.70, compared to its current price of A$13.23. This 3.5% discount suggests upside potential, particularly given the company's debt-free balance sheet and stable cash flows. Key inputs include:
- 10-year FCF forecast growth: 4.3% annually, driven by its strong market positions in auto parts, outdoor gear, and sporting goods.
- Terminal growth rate: 2.7%, aligned with Australia's long-term GDP growth.
- Cost of equity: 8.2%, reflecting moderate risk given its defensive retail model.

Analysts' average price target of A$14.78 (a 12% premium to current levels) further supports the case for undervaluation. While some models, like the Peter Lynch approach, project higher values (A$25.07), the conservative DCF estimate provides a safer baseline.

Financial Health: Debt-Free and Cash Flow Positive

Super Retail's balance sheet is a standout advantage. With zero debt, the company avoids leverage risks, freeing cash flows for reinvestment and dividends. Its cash conversion cycle remains healthy, and operating cash flow has consistently exceeded net profit, reinforcing liquidity.

Risks and Considerations

• Earnings Decline: FY2025 EPS dropped 8.7% year-on-year, a headwind linked to macroeconomic pressures.
• Growth Challenges: Competitors like Baby Bunting Group are growing at double-digit rates, while SUL's 4.3% FCF growth is modest.
• Valuation Context: Its P/E of 14x is below the sector average of 20.4x, but its PEG ratio of 3.3x hints at overvaluation relative to growth.

Investment Thesis: A Buy for Income Investors

The numbers paint a clear picture: Super Retail offers a reliable 4.9% yield, a debt-free balance sheet, and a DCF-supported fair value above current prices. While growth may not be explosive, the dividend's stability and the stock's undervaluation make it a solid income play.

Recommendation:
- Buy: For investors seeking steady dividends and a margin of safety. The stock's current price leaves room for appreciation toward the DCF target.
- Hold: If you prioritize high-growth stocks, as SUL's moderate growth may underwhelm.

Final Word

Super Retail Group isn't a high-flyer, but it's a consistent performer. With a disciplined dividend policy, robust ROE, and valuation support, it's a conservative yet compelling choice for income portfolios. Investors should monitor Q4 earnings and macro trends but remain confident in its fundamentals.