Australia | Aug 25 2008
By Chris Shaw
With a number of factors working against it in recent months including a stronger Australian dollar, a weaker consumer outlook both domestically and globally and lower equity markets the share price of youth fashion group Billabong ((BBG)) has come under pressure. Nut in the view of Merrill Lynch, the group’s profit result last Friday suggests a buying opportunity in the stock.
In the broker’s view the company delivered a very good FY08 profit result as the 5% increase in earnings to $176.4m was even better in constant currency terms. The highlight was a strong second half performance and Merrills notes this came despite a worsening in retail conditions during the period.
According to the broker, the outlook for FY09 is even better as growth in the company’s European operations remains strong, setting the stage for a 20% increase in earnings from this division. Acquisition growth helped the Australian business and further solid gains are expected, while double digit growth is also forecast for the US business, despite tough market conditions.
On UBS’s numbers, earnings growth for the company as a whole should come in within the guidance range of 10-12% in FY09, with upside risk coming from additional acquisitions such as the DaKine deal announced in conjunction with the profit result. Citi agrees, suggesting additional acquisitions will support what is already a solid organic growth outlook.
Post the result most in the market remain positive on the stock and the FNArena database shows a total of six Buy ratings and just three Hold recommendations. ABN Amro is one of those in the latter category, suggesting the slightly lower earnings growth profile the company now has given tougher market conditions means a market multiple for the stock is appropriate.
But Merrill Lynch doesn’t agree and has upgraded to a Buy rating, pointing out share price falls over the past couple of months have brought the stock back to a FY09 P/E (price to earnings ratio) of just 12x, which is a 15% discount to the market. Given there is greater earnings certainty post the profit result, the broker sees this as too cheap, particularly as growth should strengthen further in FY10 as conditions become more favourable.
Macquarie agrees and notes the fact the company has the best youth brands available leaves it well placed for further growth, even allowing for minor cuts to its estimates post the result. The broker is now forecasting earnings per share of 96.9c in FY09 and 122.3c in FY10, while consensus estimates according to FNArena stand at 93.9c and 108.3c respectively.
These forecasts translate into an average share price target according to the FNArena database of $14.28, which compares to $14.52 prior to the profit result. Leading the way is Citi with its price target of $15.70, while ABN Amro is the most conservative at $12.22. Thomson One Analytics shows a median price target on the stock of $14.75.
Today, shares in Billabong are higher, in line with the broader market, and as at 12.30pm the stock was up 27c or 2.4% at $11.57. This compares to a trading range over the past year of $9.63 to $16.36.