Premier Investments Mis-Priced?

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

By Chris Shaw

Retailing is a tough business in the current economic environment but that doesn’t mean bargains cannot be found in the sector, with WilsonHTM suggesting Solomon Lew’s Premier Investments ((PMV)) is one such bargain at present because of a mis-pricing by the market.

The broker has initiated coverage with a Buy rating, suggesting there is a current valuation gap of around 30% at current levels that should close once earnings per share (EPS) forecasts are revised higher as the cash on the company’s balance sheet, currently estimated at around $337 million,  is put to work.

The mis-pricing comes from the stock having been valued as an investment company given its previous shareholdings and so attracting a discounted multiple, but this no longer applies according to the broker as Premier’s assets now are 100% owned operating assets and its intention in the future is to invest in the same way in additional businesses.

Currently the company has a portfolio of brands within its Just Group division, these including Just Jeans, Jay Jays, Dotti, Portmans, Jacqui E, Peter Alexander and Smiggle. Together these operations give the company about a 6.4% share of the Australian clothing retail market and 4.1% of the New Zealand market.

Aside from acquisitions, another potential positive in the broker’s view is the scope for earnings in the second half of FY09 to surprise on the upside given the company is cycling relatively easy comparable results for this period last year, an outcome WilsonHTM suggests is more likely given a fvourable foreign exchange position with 100% hedging of US dollar requirements this year and 50% in FY10.

Earnings growth at present appears subdued but this could change as the group adds businesses to its portfolio, the broker’s current numbers calling for normalised EPS of 48.1c this year, 40.8c in FY10 and 46.2c in FY11. Based on these numbers the broker has a valuation on the stock of $6.25, while its target price is $6.85, which implies an EV/EBITDA (enterprice value to earnings before interest, tax, depreciation and amortisation) multiple of 6.2 times.

Supporting its target and rating the broker notes there are around $1.89 in franking credits per share at the company’s disposal, so if these were paid out via special dividends it could lift the yield to as much as 16% compared to the 6% yield achieved in FY08.

The broker is not the only one positive on the stock as the FNArena database shows three Buy ratings and one Hold, with Citi one of those with a Buy rating backing WilsonHTM’s assessment there is scope for special dividends. However, the WilsonHTM target of $6.85 is substantially higher than the average target according to the database of $5.00 and reflects the broker’s view the stock is likely cum upgrades to earnings forecasts at present.

According to the Australian Super Stock Report, a monthly updated publication by FNArena, Premier Investments is one of the most highly rated stocks on the Australian share market right now as far as individual broker ratings are concerned. WilsonHTM is not part of the group of ten leading experts monitored daily by FNArena, but its initiation of coverage report seems to support this view.

The fact that the average target price is in line with the present share price seems to support WilsonHTM’s view that upgrades to earnings estimates and thus to valuation and price targets should be forthcoming.

Shares in Premier Investments today are slightly higher and as at 11.05am the stock was up 5c at $5.00, which compares to a trading range over the past year of $3.05 to $7.84.

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