Australia | Sep 13 2007
By Chris Shaw
Historically Just Group (JST) has traded at a 20% discount to the broader market, ABN Amro noting this was a consequence of its traditional earnings volatility. The broker expects this valuation gap will now close as management has not only delivered a better than expected profit result for FY07 but provided earnings guidance through to FY10.
Profit for the year was $63.9 million, which was around 4% better than most in the market had expected. Macquarie attributes the result to a strong second half, with all brands in the group’s portfolio now experiencing good momentum.
The broker also notes margins are benefiting from the stronger Australian dollar, Credit Suisse reinforcing this view by suggesting the company’s hedging strategy should flow through into sustained stronger margins in coming years.
Management’s new earnings guidance is for 10% annual earnings growth for at least the next three years, ABN Amro pointing out this provides the market with greater earnings certainty and should drive something of a re-rating in the stock.
ABN has reacted to the guidance by lifting its earnings estimates, increasing its forecasts in FY08 by 3.2%, FY09 by 7.1% and in FY10 by 11%. The broker’s new earnings per share (EPS) forecasts are 33c, 35.9c and 37.9c respectively, while Macquarie has made no major changes to its forecasts and expects EPS of 34.3c in FY08 and 38.6c in FY09.
The broker’s estimates are close to those of Credit Suisse at 34.7c and 38.5c, which compares to the pre-result median EPS forecasts according to Thomson One Analytics of 33c and 36c.
With earnings forecasts being increased across the market so too have target prices, ABN Amro leading the way in lifting its target to $5.31 from $4.35 and Credit Suisse to $5.47 from $5.00. JP Morgan has been a little less aggressive in lifting its target to $4.90 from $4.60, while the average price target according to the FNArena database now stands at $5.03 from $4.82 prior to the result. The pre-result median price target according to Thomson One was $4.65.
The FNArena database now shows the stock is rated as Buy three times, Accumulate once and Hold four times, which compares to only one Buy rating prior to the result.
While Credit Suisse was one to upgrade (ABN Amro was the other) the broker remains a little cautious as it points out the company’s new Smiggle’s stationary retail chain is unproven in performance terms and the overseas expansion from the move into the US market is a higher risk strategy.
Shares in Just Group are little changed this morning despite a stronger overall market and at 11.20am the stock was 1c higher at $4.77.