Brokers See Value In Premier Investments

This story features PREMIER INVESTMENTS LIMITED. For more info SHARE ANALYSIS: PMV

By Chris Shaw

Credit Suisse expects the Australian consumer spending cycle will improve through FY11, a factor that supports its initiation of coverage on retail group Premier Investments ((PMV)) with an Outperform rating.

Premier is a mature busines, but given cyclical exposure the broker sees value in the stock at current levels as Premier has delivered above industry growth in its individual brands.

This reflects quality management in Credit Suisse's view, as acquisitions and the ability to keep margins stable have played a large role in this growth. There remains upside as the Portmans business continues to underperform, Credit Suisse estimating the lifting of results here could add as much as 10% to its valuation for Premier.

The other source of possible upside for Credit Suisse is further acquisitions, something the broker sees as likely given surplus cash on Premier's balance sheet and comments from management indicating an acquisition or partnership could be announced as early as July.

Premier management has a good track record to date in terms of acquisitions and Credit Suisse suggests any deal could add $1.44 per share assuming a 4% excess return. Any announcement in this regard is likely to be a short-term catalyst for the share price.

Credit Suisse is currently forecasting earnings per share (EPS) of 52.5c in FY10 and 59.1c in FY11, though it points out these forecasts include some improvement from Portmans but nothing for potential acquisitions.

These estimates compare to consensus EPS forecasts for Premier according to the FNArena database of 51.1c this year and 56.5c in FY11, which implies if Credit Suisse is right in its view the cycle will improve their could be some upgrades to consensus numbers.

Premier has underperformed the ASX200 consumer discretionary index by 13% since January 1st according to Credit Suisse, which supports its view the stock offers value at current levels. Its price target reinforces this, Credit Suisse setting a valuation based target of $8.20 implying better than 20% upside from current levels.

Credit Suisse's target is conservative compared to the market, the FNArena database showing an average target of $8.93. Leading the way is GSJB Were with a target of $10.40, while both RBS Australia and UBS also have targets of at least $9.00 on the stock. Overall the database shows Premier is rated as Buy three times Accumulate once and Hold three times.

One of those with a Buy rating is Citi, which today upgraded from its previous Hold rating on valuation grounds. Citi accepts the short-term sales outlook is fairly soft and has trimmed its earnings forecasts to reflect this, the result being its price target falls by 80c to $8.00.

But as with Credit Suisse, Citi sees an acquisition as likely to add as much as 10% to its earnings forecasts for Premier, which currently stand at 47.5c this year and 52.3c in FY11. Citi also sees scope for the company to continue paying special dividends into FY11.

Credit Suisse expects a full year dividend of 54.3c in FY10, which implies a yield of better than 8%. While it is expecting dividends to return to more normal levels of about 38c in FY11 this is still a yield of almost 6%.

Premier Investments shares today are slightly higher despite a weak broader market and as at 1.50pm the stock was up 2c at $6.68. Over the past 12 months the stock has traded in a range of $4.70 to $9.15 and the current share price implies upside of almost 30% to the consensus price target according to FNArena.

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