Australia | Sep 25 2009
By Chris Shaw
Upmarket retailer David Jones ((DJS)) delivered a full year net profit after tax result of $156.5m, which was a 14.2% improvement from last year. Analysts at Morgan Stanley point out the result was 3.5% above the market’s consensus estimate. The stockbroker views the result as a great performance given the growth in profit was achieved despite sales falling 5%.
The only real negative attached to the result was management maintaining guidance for FY10 of 0-5% growth in earnings, something the broker suggests is overly conservative given it expects an improvement of 7% this fiscal year. Bank of America Merrill Lynch agrees the FY10 guidance is conservative, but suggests it is in line with management’s plan to maintain the guidance through the Christmas trading period before making any revisions to its numbers.
While management has not changed its forecasts the broker has, lifting its earnings in both FY10 and FY11 by 16%, so in earnings per share (EPS) terms it is now forecasting 33.4c and 37c respectively. As a comparison, Credit Suisse is forecasting EPS of 34c and 38.4c for FY10 and FY11, while Citi is at 28.3c and 28.6c respectively. Consensus forecasts according to the FNArena database are 32.6c for FY10 and 35.8c for FY11.
Post the result the big question is valuation, as while brokers are generally of the view earnings growth in FY10 should be higher than the 0-5% guidance this appears to already be reflected in the share price. This is Citi’s argument behind its Sell rating, as it points out the stock is on a premium price to earnings (P/E) ratio at present.
Bank of America Merrill Lynch agrees and points out the company would need to achieve 25-30% earnings growth in FY10 to justify its current multiple, an outcome that appears unlikely given guidance is for earnings growth of significantly less. Macquarie is also cautious and rates the stock Underperform as the market has the stock on a 24% premium to Macquarie’s DCF valuation estimate.
In the broker’s view the market at current levels is buying into a cyclical margin recovery story but the problem with this is that margins didn’t fall during the downturn and so while there is some scope for expansion as the economy improves, the stock is not a typical cyclical play because of that fact.
But JP Morgan disagrees and retains its Overweight rating post the result, suggesting medium-term drivers of the stock such as sales growth, refurbishments and new store investment remain intact, while the broker is also a believer in the margin expansion story given it sees scope for further reductions in costs. As well, the broker sees potential for capital management options in the future given debt levels are low and operating cash flows are solid.
The broker is almost on its own with a positive rating, however. The FNArena database shows a total of two Buys, the other courtesy of GSJB Were, three Holds, one Reduce and four Sell ratings. Morgan Stanley is not part of FNArena’s daily coverage, but rates the stock as Underweight as it too sees the shares as fully valued at present, while it also assumes a cautious view on the retail sector in general.
The average price target on the stock is $4.58, up from $4.39 prior to the profit result, while Morgan Stanley’s target is $4.40. Shares in David Jones today are stronger despite a weak market and as at 11.10am the stock was up 10c at $5.54. Over the past year it has traded in a range of $2.02 to $5.73.
