Australia | Aug 21 2006
By Greg Peel
It’s been a tough time for auto-parts wholesaler/retailer Repco Ltd (RCL). Since listing in 2004, the stock peaked around the $3.50 mark in early 2005 and it’s been a slow grind southward ever since. Burdened by a debt ratio of 120%, Repco has suffered from high petrol prices, rising interest rates, and a general slowdown in consumer confidence that sees tricking up the car as a discretionary luxury.
Consistent profit write-downs have been the story of Repco this year, and ABN Amro analysts are expecting an FY06 profit figure 36% below FY05, at $25.7m. The stock only manages a 0/6/2 Buy/Hold/Sell ratio in the FN Arena database, and of the two “Sells”, Aspect Huntley actually downgraded in June from Sell to Avoid, which is an even lower rating.
Notwithstanding, UBS did upgrade from Sell to Hold earlier this month on the basis the stock price could simply fall no further. It was a fair call, as the stock price did manage to scramble back over the $1.00 mark.
ABN suggests management is going to have to make “some hard decisions”. One of these might be to alleviate the debt situation with an equity raising, and this sparks thoughts of comparison.
Coles Myer (CML) may not have been considering an equity raising, but with the divestment of Myer and the planned excessive capex spend on rebranding it was similarly considering a change of strategy at a cost to shareholders in the medium term. This prompted interest from private investors and sent the share price rocketing.
If Repco is considering raising further funds, could the same occur? ABN believes it’s worth pondering, although the analysts note it would be difficult to debt fund a takeover and that the short term outlook for the industry is still poor, whereas the supermarket outlook is relatively non-cyclical.
ABN will not rule out even further profit downgrades, but suggests the stock is very cheap now, at 8.2x FY07. M&A speculation may well provide a floor under the price.
The FN Arena average target price for Repco is currently $1.30, and the stock is trading at $1.16, but a lot of that target upside has come from brokers who have been quiet on Repco for a while (and we probably won’t be hearing from Aspect Huntley). More recent targets are at $1.10, still a discount to valuations.