Australia | Sep 16 2011
– Myer full year earnings meet guidance
– First guidance offered for FY12
– Guidance is unrealistic according to BA-ML
– Broker downgrades to Underperform, other ratings unchanged
By Chris Shaw
Myer ((MYR)) yesterday reported full year net profit for FY11 of $163 million, which while in line with guidance was down about 3.5% in year-on-year terms. The fall was largely the result of slowing sales, as for the full year like-for-like sales declined by 5.5%.
Along with the result, management at Myer provided guidance for FY12 of flat sales and a decline in net profit of up to 10%. Actual net profit guidance for FY12 currently stands at $146 million, which is below previous consensus of a result of around $159 million.
In the view of UBS, there is risk to the guidance provided by Myer, as it assumes improving sales momentum given the cycling of easier comparable numbers and reduced mark downs. The latter may prove difficult to achieve, as UBS notes competitors are currently heavy in inventory. The other issue is fixed costs for Myer are expected to rise in the coming year.
BA Merrill Lynch is even more forceful with respect to its view of FY12 guidance, seeing it as based on unrealistic assumptions. BA-ML expects sales at Myer will remain negative at least in FY12 and potentially into FY13, so any rise in operating costs will see gross margins fall.
To reflect this, BA-ML has cut its earnings forecasts materially, lowering its FY12 net profit estimate to $125 million from $174 million previously and in FY13 to $116 million from $184 million. In earnings per share (EPS) terms this equates to forecasts of 21.3c and 19.7c respectively.
Consensus EPS forecasts for Myer according to the FNArena database stand at 24.8c for FY12 and 25.8c for FY13, which implies downside risk to estimates if BA-ML's view proves to be close to the mark.
Christmas trading may be pivotal in this respect, as RBS Australia suggests Myer's guidance for FY12 appears to be based at least partly on the view soft Christmas trading last year won't be repeated. Current trading conditions lead RBS to also suggest current guidance for FY12 is on the optimistic side.
As with BA-ML, forecasts for coming years for RBS have been reduced but not as significantly, as in net profit terms the cuts were 4.5% for FY12 and just 1% for FY13. JP Morgan has sided more with the BA-ML view though, cutting its forecasts by 11% in FY12 and 15.1% in FY13.
For JP Morgan the key to Myer achieving guidance in FY12 will be sales, as this will impact on both gross profit margin and operating leverage and so help offset the expected increase in cost pressures going forward.
While earnings forecasts have been cut by a number of brokers there has been only one post result change in rating for Myer. This comes from BA-ML, which downgrades to Underperform from Neutral to reflect its concerns with respect to earnings in the two years ahead.
The changes mean Myer is now rated as Buy twice, Hold five times and Underperform once according to brokers in the FNArena database. The Buy ratings come from Credit Suisse and RBS, the latter arguing there remains value in Myer even allowing for an appropriate earnings multiple discount to account for current tough trading conditions.
At the other end is now BA-ML, the broker's downgrade reflecting the view share price outperformance is unlikely when earnings risk clearly remains to the downside for FY12 at least. UBS sums up the Hold argument by suggesting while Myer offers an attractive valuation, current market conditions mean there is a lack of share price catalysts.
Price targets have also been adjusted, the database showing a consensus target for Myer now of $2.51, down from $2.89 prior to the result. Targets range from BA-ML at $1.80 to Credit Suisse at $3.25.
Shares in Myer today are slightly weaker and as at 11.30am the stock was down 2c at $2.08. This compares to a range over the past year of $2.00 to $4.02. The current share price implies upside of around 18% to the consensus price target in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
