Australia | Mar 23 2010
This story features PREMIER INVESTMENTS LIMITED. For more info SHARE ANALYSIS: PMV
By Chris Shaw
Retail conglomerate Premier Investments ((PMV)) fell short of market expectations with its interim profit result yesterday, net profit of $42.4 million being impacted by a weak result from fashion chain Portmans. Stockbrokers have responded in line with what they label a disappointing result; earnings forecasts have been lowered, valuations and price targets have been cut, and ratings have been pulled back to Neutral. The overall view now seems to be that Premier Investments is looking ahead towards tougher times, unless… management uses the balance sheet strength to purchase extra growth potential.
In the shorter term, and absent any news about a corporate acquisition, it is possible the struggling Portmans chain will continue to weigh upon the share price.
The Portmans result was, in the view of Macquarie, largely a function of increased competition in the womenswear market and poor internal execution, as brand positioning remains a work in progress.
Morgan Stanley sees this as evidence Portmans will continue to weigh on group earnings near-term, as the large number of stores and the relatively high price points on its items mean a turnaround in performance will take some time.
UBS analysts agree but point out if management can get Portmans right eventually this would offer good earnings upside. Based on peak EBITDA (earnings before interest, tax, depreciation and amortisation) for the chain of $21 million in 2007 this would imply 16% upside to the stockbroker's FY10 earnings estimates.
Offsetting Portmans were stronger sales results from the likes of Just Jeans and Jay Jays, while Macquarie notes sales from Dotti, Smiggle and Peter Alexander continue to be ramped-up. Post the result, Macquarie has lowered its earnings per share (EPS) forecasts by 12% in FY10 and by 8% in FY11 to 50.1c and 53.5c respectively. The changes factor in the cycling of tougher comparable financial numbers in coming months.
Others in the market have similarly reduced their estimates, Morgan Stanley cutting its EPS forecast for this year by 4.6% to 54c. It has however lifted its FY11 estimate by 2.2% to 62c given greater confidence in the Smiggle stationary chain rollout and the expectation of a stronger Australian dollar.
GSJB Were has cut its EPS forecasts by 7-8% through to FY12, its FY10 and FY11 estimates now standing at 49.2c and 56c. Consensus EPS forecasts according to the FNArena database are 51.2c in FY10 and 56.8c in FY11.
While Portmans is clearly the major area of concern for Premier, in Morgan Stanley's view the Smiggle chain offers significant growth potential in coming years. Morgan Stanley sees scope for store numbers to be expanded significantly and gross margins are currently strong at better than 80%. Given group margins of around 59% any additional sales from Smiggle would be a positive for margins overall.
As well, Morgan Stanley notes Smiggle offers a differentiated product in a highly fragmented market, so there is little reason to think it cannot continue to deliver solid earnings growth. Morgan Stanley sees potential for Smiggle's earnings to double to $20.4 million by FY13, especially as there is potential to grow offshore as well via its franchise agreement with Lagardere, an operator of stores in airports throughout Asia.
The other most likely source of earnings growth is from an acquisition, as Citi notes Premier is currently sitting on an excess cash balance. On its numbers, a $300 million acquisition could lift EPS by 7.1% in FY11.
Without any acquisition Maquarie takes the view the tougher comparable sales figures to be cycled in coming months means Premier is trading around fair value at present, especially as there appears to be little scope for any positive surprises shorter-term (other than a possible acquisition, but we haven't seen any announcement yet).
To reflect this and strong share price performance over the past 12 months, Macquarie has downgraded to a Neutral rating from Buy previously, a rating change matched by UBS. RBS Australia also downgraded to a Hold from Buy as it too suggests a transaction is needed to deliver significant share price outperformance from current levels.
Citi was already at a Hold rating given its expectation for a tougher sales period in coming months and concerns over rising operating cost pressures.
Overall the FNArena database shows Premier is rated as Buy once, Accumulate once and Hold four times. Morgan Stanley is not in the database but rates the stock as Overweight, while it has a cautious industry view on Australian retailers. The average price target for Premier is $9.23, down from $9.34 given the cuts to earnings forecasts made post the interim result.
Shares in Premier today are weaker and as at 11.35am the stock was down 17c or 2% at $8.50. This compares to a range over the past year of $4.00 to $9.15 and implies a little more than 8% upside to the average price target in FNArena's database.
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