Australia | Feb 22 2011
– Fantastic Holdings interim result better than expected
– Company is addressing issues that have overhung the stock
– Brokers upgrade to Buy ratings
By Chris Shaw
Three brokers in the FNArena database -Macquarie, JP Morgan and Credit Suisse- provide coverage on furniture retailer Fantastic Holdings ((FAN)) and post the company's interim result all three have upgraded to the equivalent of Buy ratings from Neutral previously.
While Fantastic's interim profit of $9.8 million was down 24% from the previous corresponding period due to a weak sales environment and negative operating leverage, the result was better than the market had been expecting. JP Morgan had been forecasting a result of $8.9 million while Macquarie had been expecting a profit of $8.7 million.
What was positive about the result, in the view of Credit Suisse, was during the December half Fantastic showed some progress on issues that had been overhanging the market. One was an improvement in like-for-like sales to 6% in the December quarter, which reflected more stable pricing and fewer in-store markdowns.
The result also showed a clean inventory position and efficiencies from management investing in IT and offshore sourcing, which Credit Suisse suggests supported strong gross margins of around 46%. If these trends can continue, the broker sees further support for management's ability to manage inventory.
Given strong January sales Credit Suisse expects like-for-like sales will improve in the current half-year, while the improved inventory position will be good for group margins. This has prompted minor increases to earnings per share (EPS) forecasts, Credit Suisse lifting its numbers by up to 2% through FY12.
Credit Suisse's EPS forecasts now stand at 18.8c this year and 22.3c in FY12, while Macquarie is forecasting outcomes of 20.4c and 22.5c respectively after lifting its estimates by 6-10%. Supporting the increases to Macquarie's forecasts is the view second half sales growth will benefit from cycling easier comparable numbers.
What should also prove supportive, notes JP Morgan, are expectations of a relatively favourable competitive environment and resilient furniture sales, something that should be helped by rebuilding in Queensland following recent bad weather incidents in that state.
Costs as a portion of sales should also improve in JP Morgan's view, while the broker expects a strategic review of recent acquisitions Dare Gallery and Le Cornu is also likely to be treated as a positive by the market.
JP Morgan has been the most aggressive with respect to changes to its EPS forecasts, lifting its FY11 number by 8.3% to 19.9c and its FY12 number by 30.8% to 26.2c. Consensus EPS forecasts for Fantastic now stand at 21.6c in FY11 and 23.7c in FY12.
With EPS forecasts being increased the three brokers have also lifted their price targets, again JP Morgan being the most aggressive in increasing its target to $3.28 from $2.27. The consensus price target according to the FNArena database is now $2.96, up from $2.36 previously.
Given the increases in price targets, the upgrades to broker ratings are largely valuation driven. As JP Morgan notes, while there is a risk the weak discretionary retail environment may weight on near-term sentiment, the longer-term earnings growth profile supports a more positive view. Macquarie agrees, seeing the current share price discount as overdone given the worst now appears behind Fantastic.
Morgan Stanley is not in the FNArena database but also rates Fantastic as Overweight within an In-Line view on Australian Emerging Companies. For the broker, outperformance is likely within a constructive retail environment given the expectation Fantastic can deliver improved growth in both sales and earnings as conditions improve.
Shares in Fantastic today are higher and as at 11.30am the stock was up 8c at $2.39. Over the past year the stock has traded in a range of $1.90 to $4.10 and at current levels there is implied upside of about 25% to the consensus price target in the FNArena database. Note the overall share market is in negative territory today.
