The Buy Ratings Keep Coming For Myer

This story features MYER HOLDINGS LIMITED. For more info SHARE ANALYSIS: MYR

 By Chris Shaw

The positive ratings keep coming for recently listed Myer ((MYR)), Deutsche Bank joining a growing queue of brokers to place a Buy rating on the stock as the broker initiates coverage today with a price target of $4.60. This brings to six the number of brokers in the FNArena database rating the stock as a Buy, Aspect Huntley the only one in the database not to ascribe such a rating when it placed an Accumulate recommendation on the shares late last month, which is a less aggressive Buy of sorts.

According to Deutsche Bank the fact the stock has underperformed by around 20% since listing means Myer is now trading on a 29% discount to department store peer David Jones ((DJS)) and an 8% discount to the broader market based on its implied FY11 price to earnings (P/E) ratio.

While a more proven business model and management team and a better balance sheet suggests David Jones deserves to trade at a small premium, the current differential is simply too large in Deutsche Bank’s view, especially given the existence of potential catalysts for the Myer share price in early 2010, such as a good Christmas trading period or solid second quarter sales results.

Over the next four years Deutsche Bank expects Myer can generate 6% sales growth and 9% EBITDA (earnings before interest, tax, depreciation and amortisation) growth annually, helped by both new store openings and an expansion in gross margins from an increasing use of private labels. 

The analysts’ numbers factor in only a small increase in consumer spending, meaning if current trading momentum can be sustained there is upside risk to Deutsche Bank’s forecasts, but similarly some downside risk if consumer spending doesn’t remain at levels sufficient to deliver the 2.5% and 3.0% comparable sales growth forecast for FY10 and FY11 respectively.

In earnings per share terms Deutsche Bank is forecasting outcomes of 28c for FY10 and 30c for FY11, which compares to consensus estimates according to the FNArena database of 27.9c and 31.4c respectively. It suggests the biggest risk to its forecasts is execution risk as Myer is working on a number of projects at the same time, while as mentioned the macro-economic environment also will have a bearing on the sales results being achieved.

Credit Suisse recently indicated such a risk was not too great, pointing out soft performance last year means coming sales results for the company should look fairly good, especially if the expected productivity gains comes through. RBS Australia in its initiation last week suggested they should, as the broker’s positive view was supported by an expectation of improving gross margin performance in coming years.

While Deutsche Bank’s valuation on Myer is $4.25 per share it has set its target at $4.60, in-line with the average target according to the FNArena database of $4.61. There is quite a range of targets among the brokers covering the stock, with RBS Australia the lowest with a $4.15 target and Credit Suisse the most aggressive at $5.10.

Shares in Myer today are slightly higher and as at 10.40am the stock was up 2c at $3.79. Since listing it has traded between $3.60 and $3.98.  

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