McPherson’s, A Super Model

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This story features MCPHERSON'S LIMITED, and other companies.
For more info SHARE ANALYSIS: MCP

By Andrew Nelson

Household consumer products and commercial printing outfit McPherson’s ((MCP)) has left already positive analysts feeling justified in their beliefs after yesterday’s upgrade to its FY10 guidance. Management says it is now shooting for FY10 EPS growth of 25%, which is a far cry from the previous prediction that was released with the full year result back in August for FY10 EPS to “improve” on FY09.

In a succinct, three-paragraph release to the ASX yesterday, the company advised that previously announced margin improvement initiatives via cost and overhead reductions “are working well and continuing to have a significant positive impact”. McPherson’s went on to say that 1Q trading results have been very encouraging, with revenue for the group’s Consumer Products division already up 4.5% on last year.

RBS Australia also thinks that the higher AUD will also contribute strongly to the increased result. Credit Suisse, which was already expecting a 24% increase in EPS, also thinks that there might  be some upside to management’s guidance and its own forecasts as hedges roll off, thus providing exposure to six months of favourable AUD movements.

Both brokers, which are the only two in the FNArena database that cover the stock, have a Buy call on McPherson’s. This translates to a perfect 1.0 on the FNArena Sentiment Indicator. Following the new guidance, RBS has upgraded its EPS forecasts by 11%, 8.6% and 5.6% in FY10, FY11 and FY12, respectively. Credit Suisse has stayed put, but that’s because its numbers were already predicting this new guidance.

But RBS, much like Credit Suisse, also sees further upside from here, pointing out that and FY10 PER of 8x deserves a further re-rating. The broker notes that Breville Group ((BRG)), which it picks as the company’s closest listed domestic peer, is currently trading on an FY10 PE of 15.7x due to the recent takeover bid made by GUD Holdings ((GUD)). If one were to take off the 20% typical takeover premium from Breville’s PE, notes the broker, it would imply a 12.6x PE multiple.

Admittedly, says RBS, McPherson’s should be trading at a one-to-two PE point discount to Breville given the nature of the products it sells, but even applying a 10.6-11.6x PE multiple to McPherson’s FY10F earnings would call for a share price of around $3.99-$4.36. Given the broker currently has a target price/valuation of $3.42 pencilled in, its easy to see why it believes there is upside.

Again, Credit Suisse is a little ahead of the game in terms of valuation as well, so its valuation stays pegged at $4.00, with the broker believing that it is only reasonable to assume that shares will continue to trade up towards Breville and GUD. Yet while the brokers have similar price targets – CS is at $3.50 – they both get there a different way.

CS doesn’t expect the stock will be able to completely close the gap with its two main peers because of “board issues, a perceived weaker earnings profile,debt levels and its payout”. As such, the broker has slapped a 25% discount on MCP versus GUD and the other median small industrial stocks that it covers.

Straight after the news hitting the market yesterday, shares rallied from $2.83 to $3.09 before pulling back a little to close at $3.04. Calmer heads have prevailed today, with the shares falling 17c to $2.87, but still holding above yesterday’s starting point. Over the last 12 months shares have traded between 27c and $3.00.

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