Modest Outlook Maintained For Super Retail

This story features SUPER RETAIL GROUP LIMITED. For more info SHARE ANALYSIS: SUL

-Concerns over margin recovery
-Customers sensitive to price
-Acquisitions taking longer to pay off
 

By Eva Brocklehurst

Broker views diverge somewhat on the outlook for Super Retail's ((SUL)) businesses in FY16. The company's AGM revealed automobile and sports categories are performing best, while leisure continues to experience softness related to restructuring activities. The margin in leisure was lower largely because of clearance activity at Ray's Outdoors and a continued focus on competitive pricing at BCF.

The divergence in outlook is reflected in FNArena database, which has five Buy ratings, one Hold and two Sell for Super Retail. The consensus target is $10.07, suggesting 8.3% upside to the last share price. The dividend yield on FY16 and FY17 estimates is 4.7% and 5.2% respectively.

JP Morgan is concerned about the potential to recover margins in recently acquired businesses. Gross margins have increased in the first half so far for automobile and sports categories and declined in leisure. The broker also cites a risk of a slowdown among consumers in Queensland, where the company is strongly represented, as well as a lack of valuation support.

The company may have a leadership position in fragmented retail categories and significant opportunities to increase market share but there are several issues which underpin JP Morgan's Underweight rating.

Recently acquired businesses, such as WorkoutWorld and Infinite Retail, are struggling as integration continues, and there is a risk that further acquisitions will be undertaken to meet the company's ambition to be one of the five largest retailers in Australasia.

JP Morgan would become more constructive on the stock at a lower share price, or once improvements in the new businesses become more certain.

Store opening targets are largely as expected, although Deutsche Bank notes closures in sports stores are ahead of expectations, with seven to be closed versus prior indications there would be just three.

The broker also observes, while the automobile sector is resilient, customers remain highly sensitive to price and this will be a challenge over the next year, as currency hedges are rolled off.

Although earnings are likely to improve over the next year, Deutsche Bank highlights the amount of capital that is being used to underpin this expansion. The re-positioning of Ray's Outdoors is not expected to be easy and there is downside risk emanating from currency headwinds.

Automobile and sports sales have accelerated on the back of reduced discounting and UBS is more upbeat, expecting the company will achieve a 14% rise in earnings in FY16. Beyond, the broker considers there is upside risk should the company execute on its efficiency target. The broker forecasts 11% 3-year compound growth in earnings over FY16-19.

Drivers of this forecast include ongoing strength in sports and improved margins via the managing of mark downs and the sales mix, as well as working capital release from a reduction in costs over the next 2-3 years. UBS considers the stock offers a compelling investment proposition on a medium-term view.

Morgans also likes the stock for its FY16 multiples with a price/earnings ratio of 14.4 against forecasts for 15% earnings growth. The broker understands that the clearance activity at Ray's Outdoors is being reduced. Also,WorkoutWorld and Infinite Retail are on track to be integrated into the sports division by Christmas.

Management expects a small trading loss in these two businesses ahead of full integration. Morgans acknowledges management did not reiterate guidance that these two would break even in FY16.

WorkOutWorld is on track, as Morgans understands, while Infinite Retail is taking long than expected and could produce a $2m earnings loss in FY16. Still, the broker suspects there is enough momentum in the rest of the business to offset this impact.
 

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