Treasure Chest | Jun 26 2013
– Competitor gone
– New store upside
– AUD impact not overwhelming
By Greg Peel
At the end of April, discount retailer The Reject Shop ((TRS)) raised $44m in new capital through a $30m institutional placement at $16.20 and a retail share purchase plan which was more than twice oversubscribed, leading the board to increase acceptances to $14m from an intended $10m. The proceeds have been used to rebalance the company’s debt-equity ratio ahead of planned store roll-outs.
The TRS share price has rocked and rolled through 2013, rising with the market to the company’s late February interim profit result, falling on a warning of market share loss through competitive pressures, rising post-raising to the market peak in May, and mostly falling ever since. The market fall from the peak has been largely indiscriminate, but as an importer of foreign goods of the “two dollar shop” variety TRS stands to suffer from a weaker Aussie dollar.
Despite the rocking and rolling, brokers have largely regarded TRS as over-valued throughout 2013, with Credit Suisse maintaining an Underperform rating after the interim result and Macquarie setting a Neutral rating post-raising. Macquarie’s last report was nevertheless upbeat, given TRS’ major competitor had since imploded. With 40 new stores planned to be rolled out in FY14, Macquarie saw advantages being reflected in earnings from FY15.
Only three FNArena database brokers cover TRS, with UBS being the third. UBS acknowledges the currency pressures on the company but suggests the impact will be offset by a benign USD cost environment and the potential for 2-3% price inflation. Beyond the currency issue, a review of the company’s fortunes has led UBS to upgrade its recommendation to Buy from Neutral.
As a discount store, TRS offers counter-cyclical defensiveness, the broker suggests, if the Australian retail environment continues to weaken. The collapse of the major competitor removes market share concerns and the company’s accelerated store roll-out plan offers potential upside to guidance, UBS believes.
There is also scope for incremental margin improvements. All up, UBS calculates a rough split of 60% of growth from store roll-outs, 20% from margin gains and 10% from like-for-like sales growth. TRS offers a three-year compound annual growth rate of around 19% compared to a peer average of 9%.
On the magnitude of this growth rate, and fundamentals behind the growth, TRS deserves an FY14 forward PE of 17x, the broker suggests. As a result, the broker has lifted its target to $18.20 from $16.55, aided by a 5% increase in the analysts’ FY15 earnings forecast to be 7% above consensus.
Credit Suisse has not updated its view on the company since the February result, and is sitting on a target of $13.55. Macquarie set a target of $18.50 in May which was about where the shares were trading at the time, hence the Neutral rating. The shares are currently trading under $17.00. On the UBS increase, the consensus target has now risen to $16.88 from $16.20 but Credit Suisse’s target is arguably out of date.
Consensus earnings forecasts nevertheless show a 10% drop for FY13 followed by a 31% increase in FY14, translating into a 55% increase in dividend for a 3.5% yield.
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