Myer Won’t Be Singing In The Rain

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

By Chris Shaw

Prior to today the FNArena database had Myer Holdings ((MYR)) rated as Buy six times, Hold once and Underperform once. A downgrade by Credit Suisse this morning has made this ratio a little less positive.

The Credit Suisse downgrade is to Neutral from Outperform and reflects the broker's view there are increasing downside risks to earnings in the first half of FY11 in particular. The risk comes largely from adverse weather conditions, as unseasonably cool and wet conditions appear to be deferring sales revenues for Myer. Forecasts are for further rain in December, so conditions are not expected to improve anytime soon.

What this means, in Credit Suisse's view, is the revenue that would ordinarily be expected in the October to December period is now likely to come in the traditional sales period of January, which has the potential to negatively impact on earnings.

The delays in sales are coming during what Credit Suisse suggests was already looking to be a difficult first half for Myer, this reflecting around $10 million in one-off costs associated with the start of trading at the new Bourke Street store and the recent introduction of new point-of-sale systems.

With possible pressure on interim earnings, Credit Suisse takes the view there are unlikely to be any further positive catalysts for Myer until the second half of 2011.

As an example, the broker notes Myer management has a target for an EBIT (earnings before interest and tax) margin of 10% in 2015. Achieving this will require both sales revenue growth and gross margin improvement and both of these now appear 2H11 stories at best in Credit Suisse's view.

This caution over the upcoming interim result leads the stockbroker to suggest investors should reduce exposure to Myer leading into the result, hence the downgrade in rating. At the same time, Credit Suisse has cut its price target to $3.90 from $4.60, taking the view a 10% discount to valuation is now appropriate given the current difficult environment for sales revenues and margins.

Credit Suisse's reduction in price target puts it near the bottom of the list according to the FNArena database, with only MA-Merrill Lynch having a lower target of $3.40. RBS Australia is most positive with a target of $4.88, while Macquarie is a close second at $4.71. The consensus price target according to the FNArena database is $4.31.

Shares in Myer today are slightly higher and as at 11.50am the stock was up 1c at $3.56. Myer shares have traded in a range of $2.86 to $4.02 over the past year and the current share price implies upside of around 20% to the consensus price target in the FNArena database.

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