Australia | Jun 17 2014
-Not just budget and weather
-Persistent BCF weakness
-Automotive most resilient
-Buying opportunity seen
By Eva Brocklehurst
Super Retail ((SUL)) has delivered another downgrade to forecasts for FY14, issuing profit guidance of $107-109m and blaming subsiding consumer confidence in the wake of the federal budget and the warm start to winter.
Negative feelings about the federal budget have been highlighted by the extent to which retail sales have been affected in the last six weeks but several brokers believe, in Super Retail's case, there are some internal issues that need to be fixed as well. Deutsche Bank does not think weak post-budget consumer sentiment is only to blame. Sports and Leisure are deteriorating with issues around ranges and systems, exacerbated by the weak trading environment. A 40% retracement in the share price over the last six months, as well as revisions to FY15 expectations, means the stock is now trading at the widest discount in two years to the ASX Small Industrials Index. The issues that are specific to the company may take some time to resolve and Deutsche Bank's reluctance to take a positive stance, maintaining a Hold rating, is based on the risk of further downgrades in FY15. The Boating/Camping/Fishing (BCF) division has been affected by cannibalisation from the opening of additional stores as well as persistent weakness in regional and mining related areas.
Credit Suisse echoes the focus on the mix of internal and external factors at the heart of the downgrade. Super Retail is expected to cycle the re-basing of revenue in BCF, Ray's Outdoors is expected to improve on changes to ranges and store refurbishment, while Rebel and Amart remain well positioned. Hence, the broker views this as the opportunity to upgrade the rating to Neutral from Underperform. Execution risks from supply chain changes in FY15 are relatively high, Credit Suisse acknowledges, but benefits are likely to accrue from FY16.
The miss in sales in recent weeks leads Citi to downgrade forecasts by 7% in FY14 and 9% in FY15. The downgrade cycle may end soon but the broker thinks the first half of FY15 will still be difficult because of excess inventory. The business is high quality and valuation is appealing so the broker retains a Buy rating. Trends should improve in July and August but the federal budget is likely to drag down discretionary retail sales growth by around 2% on Citi's estimates. The broker expects to gain confidence from improved clarity on management changes in the leisure segment in the next two months. BA-Merrill Lynch also believes the stock remains a buying opportunity as profit is forecast to grow by 20% over the next two years on base case assumptions.
JP Morgan is sticking with an Overweight rating, largely on the back of multiple drivers from the fragmented markets to which the company is exposed. The elevated levels of operating and capital expenditure should eventually drive down operating costs and capital intensity should reduce. The broker also observes an increase in the share price despite such a negative trading update, which suggests this downgrade – the company's third for FY14 – was somewhat priced in. Moreover, JP Morgan makes the point that Super Retail has rarely reported negative like-for-like sales growth and the recent decline is over a very short period. Trading does move around significantly over a period of months.
UBS notes top line momentum has slowed across all divisions, with automotive segments the most resilient. The broker believes Super Retail remains a compelling investment although it will take some time to re-rate. The drivers of such a re-rating are threefold. Firstly, sales should improve in Sports and Leisure when the execution issues are cycled. Then there is margin improvement potential in the first half of FY15, as heavy discounting in Leisure is cycled. Finally, the delivery of supply chain improvements with the Queensland distribution centre should herald the release of $75m in working capital amid a 2% reduction in costs. The broker thinks now is the time to buy the stock.
On FNArena's database there are six Buy ratings and two Hold. The consensus target price is $10.39, suggesting 21.7% upside to the last share price. This target compares with $11.17 ahead of the update. The FY14 forecasts signal a dividend yield of 4.4% and FY15 forecasts signal 4.8%.
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