Super Retail Gaining Momentum

This story features SUPER RETAIL GROUP LIMITED. For more info SHARE ANALYSIS: SUL

Super Retail has taken positive action on its problematic divisions and brokers welcome renewed momentum in the business.

-Strong trading in first half supported by improving margins
-Improvements at Ray's and BCF seen gaining traction with consumers
-Digital strategy in the face of increased online competition the main concern
 

By Eva Brocklehurst

Super Retail's ((SUL)) major divisions – automotive, sports and leisure – appear to be all back on track and brokers welcome a clear strategy and a management team that is delivering results. The company has taken positive action on its problematic Ray's and the Infinite Sports businesses, while reducing corporate costs. The problems with the promotional strategies at BCF have been largely addressed and Ray's is no longer a drag on the company's performance to the extent it once was.

Strong Overall Trading

Strong trading across the businesses was supported by solid comparables and improving margins in the first half. Deutsche Bank notes the turnaround in leisure is well under way, with BCF in particular showing good growth. The broker also highlighted working capital improvements and cost savings from supply chain investments. This highlights the advantage the company has from its scale, underpinning its ability to weather a soft retail environment.

Morgans agrees BCF is looking much better, with better pricing and promotional architecture gaining traction with consumers. The broker believes the stock's multiples are undemanding and the strong earnings growth forecast is achievable. Morgans calculates that Ray's contributed around $50m of revenue in the half and a -$2m loss at the EBIT level. The business is expected to deliver a 9.5-10% EBIT margin in the next couple of years, which remains below the group's long-term leisure EBIT margin target of 11%.

Now the Masters enterprise has disappeared from the market the company has "clear air" with respect to its tools category. Aggressive clearance activity from Masters affected the company for around 10 weeks in the first half. Morgans also believes improved trading in Queensland and Western Australia, which remain reasonably tough, provide a tailwind.

Macquarie envisages plenty of evidence for earnings and margin upside in BCF beyond FY17. The measures taken to improve pricing and promotion, in particular the move away from "everyday low prices", looks to have delivered an uplift in gross margin.

The automotive division is the stand-out performer for the broker, as it delivered another half of double-digit EBIT growth. Credit Suisse also expects the automotive division to be the mainstay of the company's performance and refurbishments in the second half should support sales growth. The broker upgrades to Neutral from Underperform.

Morgan Stanley believes the stock is still too cheap for its projected three-year compound growth rate in earnings per share of 16% and maintains an Overweight rating. The broker notes sports was the weaker of the three main divisions in terms of its performance into the second half, owing to the timing of promotions and and "out-of-stock" situations, which have been rectified. Nevertheless, a dominant market position and opportunity for further margin expansion means the overall outlook is sound.

As the improvement in BCF flows through to the second half and the losses in Ray's decrease, Morgan Stanley expects an almost doubling of profit for FY17, and that leisure should be the main driver of growth over FY17. Further working capital benefits, driven by supplies chain optimisation and higher earnings growth, also positions the balance sheet well, in the broker's opinion.

Areas Of Concern

The main risks in general, perceived by brokers, are slowing consumer spending, heightened competition, margin compression and a significant fall in the Australian dollar. There is also the expectation that Infinite Retail will break even in FY17 and, Morgans emphasises, a failure to do so would be a negative.

The main risk to forecasts that UBS flags is a cyclical slowdown, or an irrational marketplace that is disrupted by new competition, such as Amazon or Decathlon. Credit Suisse also suspects the market will be looking more closely at the company's low profitability in digital, as this channel is only likely to grow in importance. The company acknowledges that online is only marginally profitable in automotive, while loss-making in the sports and leisure divisions.

Credit Suisse believes the digital channel is only likely to grow with Amazon's entry to this market. Amazon is providing re-sellers with a cost base of around 20% of sales and Super Retail will need to address this challenge, either by finding a way to reduce its own cost base or joining the Amazon platform.

FNArena's database shows six Buy ratings and two Hold. The consensus target is $11.42, suggesting 6.8% upside to the last share price. Targets range from $10.42 (Credit Suisse) to $12.00 (Morgan Stanley).
 

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