Treasure Chest | Oct 06 2014
By Greg Peel
In July last year it appeared the once dominant, Australian-founded global surfwear retailer Billabong International ((BBG)) was set to meet its demise. After a peak at close to $17.50 in 2007, the GFC and the company’s debt burden conspired to send the share price to a near terminal 13c.
At that point Billabong was rescued with a third party refinancing deal which saved the company but seriously diluted shareholder equity and earnings per share upside. Asset sales have helped shore up the balance sheet and takeover speculation saw Billabong’s price spike up a couple of times in the interim, but nothing eventuated and any earnings recovery was still proving challenging at the company’s first half FY14 result in February.
It was at the FY13 result the previous August that management outlined a seven point recovery plan for Billabong, and at the time neither management, nor stock analysts, assumed a swift and easy road ahead. The challenge was underscored by an FY14 result, released this last August, which showed a 35% drop in earnings from FY13. But sales growth had improved, at least in Asia Pacific and Europe if not so in North America, and this was enough to encourage Deutsche Bank to upgrade its rating to Hold from Sell.
Citi stuck with a Hold rating and the only other FNArena database broker left covering the stock after its fall from grace, JP Morgan, was unable to make a recommendation due to its role as advisor to the company.
That period of restriction has nevertheless now ended. JP Morgan is again able to make a recommendation and has effectively double-upgraded from its Underweight rating in place last February to an Overweight rating. The broker has lifted its twelve-month target price to 87c from 52c prior to restriction.
Progress is being made on Billabong’s seven-part turnaround plan and the broker retains confidence in a path of revenue growth, margin expansion and capital efficiency. Investors, too, have seen encouraging signs for the retailer, hence the share price has rallied from a previous low of 46c in August to 69c as at Friday’s close. But despite the rally, and despite a likely moderation in the pace of earnings recovery in FY15 and ongoing near term trading challenges, JP Morgan believes the risk-reward balance for investors remains attractive.
The company’s turnaround is still in its early stages but the broker can identify drivers of medium to longer term performance improvement, including the exploitation of Billabong’s well-known brand through marketing strategies, gross margin expansion through supply chain organisation and financial discipline, and capital improvement through capex discipline and working capital improvements.
While higher marketing costs will need to be absorbed, the strategy should deliver growing revenues, a lower overall cost of doing business and, subsequently, higher earnings margins, the broker suggests.
At 87c, JP Morgan’s price target is now a stand-out next to Citi on 60c and Deutsche Bank on 50c, both of whom retain Hold ratings to JP Morgan’s Buy equivalent.
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