Australia | Nov 29 2011
– Citi initiates on Oroton With Neutral rating
– Stockbroker sees stock as fair value at present
– Asia offers upside potential but some time away
– Only non-Buy recommendation in FNArena database
By Chris Shaw
Prior to today, luxury goods retailer OrotonGroup ((ORL)) was rated as a Buy by all four brokers in the FNArena database to cover the stock. All were attracted to a combination of a strong balance sheet, the potential for Asian expansion to boost group earnings and a solid on-line product offering that put the stock among the top of the retail offerings.
Citi has initiated coverage with a slightly less positive view, rating Oroton as Neutral with a price target of $8.30. This brings the consensus price target for Oroton according to the database to $8.91, down from $9.07 previously.
Citi's Neutral rating is despite a solid earnings growth outlook, the broker forecasting earnings per share (EPS) growth for Oroton of 11% in FY12 and 7% in FY13. Citi's EPS forecasts stand at 67.4c and 72.1c respectively, which compares to consensus EPS estimates of 66.5c for FY12 and 73.5c for FY13.
Longer-term, Citi expects Oroton can deliver 44% sales growth over the next five years. Almost half of this is expected to come from the introduction of more fashion products at higher price points.
Citi has confidence in these expectations given competing products are even more expensive than those offered by Oroton. There is a potential risk to Citi's sales growth estimates from global luxury brands harmonising prices, as this would reduce the premium paid at present by Australian shoppers.
Another risk is to the margin outlook, as Citi expects the Asian expansion will put some pressure on current margins given increased promotional activity. Adverse exchange rate movements may also see margins come under pressure.
At present Oroton is the exclusive distributor of Polo Ralph Lauren in Australia and New Zealand, but Citi doesn't see this remaining the case indefinitely. As the broker notes, the licence is likely to be transitioned back into a wholly-owned operation sometime in the next 10 years.
Similar distributorships in the Asian and Pacific regions have already been acquired, making such a move more likely. Citi points out Oroton would receive a payout if such a change was made, but any sale would likely still be value dilutive.
With respect to Asia, Citi agrees the market offers a highly lucrative opportunity for Oroton but expects any success in the region will take some time to develop. On Citi's numbers Oroton is only likely to break-even in Asia in FY14 and will only have 30 stores by FY15. Citi estimates each 10 stores above this level adds $0.58 to its valuation for Oroton.
This view on Asia forms the basis for Citi's Neutral rating. Given no upside from the region is expected to materialise over the next 12 months, the stockbroker argues Oroton shares looks fully valued on a FY12 earnings multiple of 11.8 times.
As a result, Citi expects the Oroton share price will range trade between its PE relative valuation of $7.33 and a sum-of-the-parts valuation of $8.49 over the coming year. This $8.49 sum-of-the-parts valuation of Citi is below all other price targets for Oroton, the lowest of which is Credit Suisse at $8.60. Targets range as high as BA-Merrill Lynch at $10.09.
The trading range over the past year for Oroton shares has been $5.95 to $9.50 and the current share price implies upside of a little over 10% to the consensus price target in the FNArena database.
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