Kathmandu Shows How To Make An Entrance

This story features KMD BRANDS LIMITED. For more info SHARE ANALYSIS: KMD

By Chris Shaw

Specialty outdoor apparel and equipment retailer Kathmandu ((KMD)) over-delivered with its initial interim profit result yesterday, reporting an interim profit of NZ$8 million that was as much as 20% better than prospectus indications and broker forecasts.

GSJB Were viewed new store openings as one driver of the result, noting 8 new stores means the company now has 90 in total, up from 80 in the previous period. The store rollout program is now ahead of schedule, Macquarie noting Kathmandu looks set to open 15 stores in total in FY10, up from 12 previously. A further 15 stores are expected to be opened in FY11.

UBS expects Kathmandu will increase its store footprint to more than 150 by 2014 compared to 90 now, while the stockbroker points out capex expectations are now less than NZ$12 million despite the increase in new stores planned.

Same store sales growth was also good at 13.7%, or 11.7% at constant foreign exchange rates. Even though the company was cycling a relatively weak period, Macquarie viewed the same store sales result as a strong one.

These factors combined meant total sales increased 27% to NZ$106.6 million, which is well above the prospectus forecast of NZ$97 million. The solid sales number was assisted by strong margins, as GSJB Were notes positive fixed cost leverage meant EBITDA (earnings before interest, tax, depreciation and amortisation) margins rose to 17% from 15.3% previously.

While the better than expected result was not matched by any increase in full year guidance for a net profit of NZ$30.9 million, this is now viewed as conservative as stockbrokers have lifted their forecasts for FY10 and coming years.

As examples, GSJB Were has lifted its earnings forecasts by 6-8% through to FY12, its earnings per share (EPS) estimates now standing at NZ16.4c in FY10 and NZ19.6c in FY11. Credit Suisse lifted its EPS estimates by 8.6% and 4% in FY10 and FY11 and is now forecasting NZ18.2c and N19.4c respectively.

Increases of 14% and 11% respectively to Macquarie's forecasts means its EPS estimates are NZ17.5c and NZ20.3c, which assumes like-for-like sales growth slows to around 4% in the second half. Macquarie also anticipates the Australian operations will face a tougher comparative period in a rising interest rate environment.

Given the increases to earnings forecasts it is no surprise price targets have also moved higher, Macquarie lifting its target to A$2.30 from A$2.10 and UBS to A$2.30 from A$2.20. Credit Suisse has also lifted its New Zealand dollar target to $2.50 from $2.40.

While it downgraded Kathmandu to Neutral from Outperform post the result to reflect recent share price movement, Credit Suisse still sees some value, pointing out the stock continues to trade at a earnings multiple discount to some peers despite a more attractive earnings growth outlook.

To highlight this CS suggests if a multiple of 13.5-14.5 times earnings was applied to the stock this would equate to a valuation range of NZ$2.55-$2.65. However, says CS, a re-rating to such a level would require greater clarity on second half earnings.

UBS continues to regard the stock as undervalued, suggesting an earnings multiple of 11.5 times in FY11 is undemanding given an expected capitalised annual growth rate in EPS of 17% for 2011-2014. Given this is at the upper end of Kathmandu's peer range, UBS retains its Buy rating. GSJB Were agrees the stock is a Buy, supported by similar earnings growth forecasts to those of UBS.

Macquarie is also attracted to Kathmandu given the current discount to its high-growth specialty retail peers and the potential for upside surprise from an improving New Zealand retail environment. UBS is similarly positive on the potential of the New Zealand operations to surprise given trading conditions appear to be stabilising.

The four brokers are currently the only ones in the FNArena database to cover Kathmandu, meaning it is rated as Buy three times and Hold once. Shares in Kathmandu today are weaker and as at 11.10am the stock was down 5c at $1.86. This compares to a range of $1.48 to $1.91 since listing in the final quarter of last year.

Given an average price target according to the database of $2.30 there is around 25% implied upside from current levels.

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