- Kathmandu result solid given tough conditions
- Earnings growth to be driven by new stores, refurbishments
- Stock seen as offering value at current levels
- Buy ratings continue to dominate

By Chris Shaw

Retail conditions have been tough for some time, so the fact Kathmandu Holdings ((KMD)) delivered a solid full year earnings result was well received by the market. Profit for the year of NZ$39.1 million was up 24.5% relative to the previous corresponding period, earnings being driven by higher inventory investment, favourable weather conditions and better performance from newly opened stores.

New store opening will be a key to earnings growth going forward, RBS Australia noting Kathmandu plans to open 15 new stores in FY12. This would equate to 13% store space growth, while product category expansion is forecast to be about 10% per year.

The new store rollout will require higher capex, Macquarie noting Kathmandu expects to double capex in FY12 and FY13 for both new store and refurbishments and re-branding of the existing store network. This investment is seen as critical for the longer-term health and growth potential of the Kathmandu brand.

The major risk for earnings in the view of UBS is pressure on gross profit percentage given the difficult retail environment at present and the fact weather conditions in FY11 were very favourable. On UBS's estimates, a 100-basis point change in gross profit percentage equates to a 5.6% change in earnings per share.

Given Kathmandu's result had been well guided and no specific earnings guidance for FY12 was provided, there are only modest changes to earnings forecasts post the result. In earnings per share (EPS) terms RBS has adjusted its forecasts for FY12 by just over 1%, while Macquarie has trimmed its numbers by 2% and UBS has made no changes.

Kathmandu reports in New Zealand dollars and EPS forecasts for FY12 range from NZ21c to NZ23c, while for FY13 the range is NZ$24-NZ$27c. This compares to the result for FY11 of NZ$19.5c.

Price targets in Australian dollars range from $1.90 to $2.20.

Post the Kathmandu result there have been no changes in broker ratings, the FNArena database showing four Buy recommendations and one Hold rating. The hold comes courtesy of UBS, the broker suggesting investors should look for a lower entry point into the stock given strong share price performance.

The Buy argument is in general a valuation call, as the brokers covering the stock accept retail conditions will remain tough for some time. Both RBS and Deutsche Bank estimate Kathmandu is trading on a FY12 earnings multiple of less than 10 times, which is attractive relative to the market.

Macquarie suggests current valuation for Kathmandu is not demanding, especially given the full year result delivered increased confidence in the business model and the positive medium-term growth outlook.

Credit Suisse agrees, seeing no reason why the factors that drove solid growth in FY11, which included store rollouts and refurbishments and solid sector trends, will not continue through the coming year. Management supports this view given a positive outlook for the year ahead.

The current share price implies upside of around 22% to the $2.08 consensus price target in the FNArena database.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

- Premier Investments result met expectations
- Guidance maintained for FY12
- Weakening retail environment sees cuts to earnings forecasts
- Two broker ratings downgraded post result

By Chris Shaw

Retail group Premier Investments ((PMV)) reported an adjusted net profit after tax of $51.5 million, a result down 20% relative to the previous corresponding period. The result contained few surprises as management had guided in earnings in July.

In assessing the result, Macquarie notes Premier's largest brand Jay Jays delivered disappointing performance in the period. As an offset, the smaller but current drivers of top line growth, Smiggle and Peter Alexander, performed strongly. Macquarie also notes an update on a strategic review shows most initiatives are currently on track or a little ahead of schedule.

Credit Suisse picked up on the fact underlying fixed cost growth per store of 4% and weak sales were unable to be offset by cost reductions, meaning operating leverage for the period was negative. Additional marking down of inventory was needed and this also impacted on earnings, but on the positive side the move leaves Premier with a clean inventory position for the first half of FY12.

With the result, management at Premier indicated that while earnings guidance for FY12 is unchanged, trading for the first six weeks of 2012 has been weaker than expected. As Deutsche notes, this reflects a further deterioration in both the macro environment and consumer confidence. 

To deal with this Premier intends accelerating its cost-out program and the rolling out of additional Peter Alexander and Smiggle stores, but brokers see this as unlikely to be enough to avoid any earnings impact in the coming year at least.

Changes to earnings forecasts reflect this, with most in the market responding to the result and outlook commentary by trimming estimates through FY13. As examples, Citi has lowered its earnings per share (EPS) estimates by 1.7% in FY12 and by 3.3% in FY13, while Credit Suisse has dropped its forecasts by 6.2% and 4.6% respectively. 

Consensus EPS forecasts for Premier according to the FNArena database now stand at 39.3c for FY12 and 45.9c for FY13. This implies relatively flat earnings in FY12 relative to FY11.

Changes to earnings forecasts have flowed through to changes in price targets, with the consensus target for Premier according to the database now standing at $5.75. This is down from $5.95 prior to the result.

Brokers have also responded by downgrading ratings for Premier, with both Macquarie and UBS downgrading to Neutral from Outperform ratings previously. The downgrade is a valuation call for Macquarie, as in July the broker upgraded Premier given an attractive multiple and the potential for cost cutting to offset the tough retail environment.

Since July however Premier's share price has risen by around 7% while the retail environment appears to have deteriorated even further. This suggests limited potential for outperformance, particularly given any earnings recovery in FY12 will likely be weighted to the second half of FY12.

UBS agrees, taking the view the current operating headwinds are likely to outweigh any cost cutting benefits in the shorter-term at least given the weakening retail sales environment. Longer-term there remain positives in UBS's view, especially given a net cash and investment position of around $1.85 per share offers scope for acquisitions.

Overall the FNArena database shows Premier is rated as Buy once and Hold five times. The Buy comes from Deutsche Bank and reflects both value at current levels given a forecast earnings multiple of eight times in FY13 and cash on the balance sheet providing some backstop to the share price.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

 - Myer full year earnings meet guidance
 - First guidance offered for FY12
 - Guidance is unrealistic according to BA-ML
 - Broker downgrades to Underperform, other ratings unchanged

By Chris Shaw

Myer ((MYR)) yesterday reported full year net profit for FY11 of $163 million, which while in line with guidance was down about 3.5% in year-on-year terms. The fall was largely the result of slowing sales, as for the full year like-for-like sales declined by 5.5%.

Along with the result, management at Myer provided guidance for FY12 of flat sales and a decline in net profit of up to 10%. Actual net profit guidance for FY12 currently stands at $146 million, which is below previous consensus of a result of around $159 million. 

In the view of UBS, there is risk to the guidance provided by Myer, as it assumes improving sales momentum given the cycling of easier comparable numbers and reduced mark downs. The latter may prove difficult to achieve, as UBS notes competitors are currently heavy in inventory. The other issue is fixed costs for Myer are expected to rise in the coming year.

BA Merrill Lynch is even more forceful with respect to its view of FY12 guidance, seeing it as based on unrealistic assumptions. BA-ML expects sales at Myer will remain negative at least in FY12 and potentially into FY13, so any rise in operating costs will see gross margins fall.

To reflect this, BA-ML has cut its earnings forecasts materially, lowering its FY12 net profit estimate to $125 million from $174 million previously and in FY13 to $116 million from $184 million. In earnings per share (EPS) terms this equates to forecasts of 21.3c and 19.7c respectively.

Consensus EPS forecasts for Myer according to the FNArena database stand at 24.8c for FY12 and 25.8c for FY13, which implies downside risk to estimates if BA-ML's view proves to be close to the mark.

Christmas trading may be pivotal in this respect, as RBS Australia suggests Myer's guidance for FY12 appears to be based at least partly on the view soft Christmas trading last year won't be repeated. Current trading conditions lead RBS to also suggest current guidance for FY12 is on the optimistic side.

As with BA-ML, forecasts for coming years for RBS have been reduced but not as significantly, as in net profit terms the cuts were 4.5% for FY12 and just 1% for FY13. JP Morgan has sided more with the BA-ML view though, cutting its forecasts by 11% in FY12 and 15.1% in FY13.

For JP Morgan the key to Myer achieving guidance in FY12 will be sales, as this will impact on both gross profit margin and operating leverage and so help offset the expected increase in cost pressures going forward.

While earnings forecasts have been cut by a number of brokers there has been only one post result change in rating for Myer. This comes from BA-ML, which downgrades to Underperform from Neutral to reflect its concerns with respect to earnings in the two years ahead.

The changes mean Myer is now rated as Buy twice, Hold five times and Underperform once according to brokers in the FNArena database. The Buy ratings come from Credit Suisse and RBS, the latter arguing there remains value in Myer even allowing for an appropriate earnings multiple discount to account for current tough trading conditions.

At the other end is now BA-ML, the broker's downgrade reflecting the view share price outperformance is unlikely when earnings risk clearly remains to the downside for FY12 at least. UBS sums up the Hold argument by suggesting while Myer offers an attractive valuation, current market conditions mean there is a lack of share price catalysts.

Price targets have also been adjusted, the database showing a consensus target for Myer now of $2.51, down from $2.89 prior to the result. Targets range from BA-ML at $1.80 to Credit Suisse at $3.25.

Shares in Myer today are slightly weaker and as at 11.30am the stock was down 2c at $2.08. This compares to a range over the past year of $2.00 to $4.02. The current share price implies upside of around 18% to the consensus price target in the FNArena database. 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

- Woolworths hosts analysts tour of Masters store
- Initial reactions mixed
- Citi suggests currency guidance for Masters is conservative
- Brokers ratings for Woolworths unchanged

By Chris Shaw

Woolworths ((WOW)) has opened its first Masters home improvement store in Braybrook, Victoria, and the company has hosted an analysts tour that has provided some first impressions of the new competitor to sector heavyweight Bunnings ((WES)).

Citi's first impressions of the store were positive, particularly with respect to the product range and store format. One concern was the trade area, something Citi sees as important given trade represents about 50% of sales in the industry. 

In Citi's view Masters will need to stock a deeper range of products to fully satisfy the trade end of the market, but with improvements expected the broker sees scope for this offering to become more attractive.

For JP Morgan the tour highlighted a focus on all customer segments, as the product range at Masters extends beyond hardware and into the home improvement end of the market. The current focus is on customer experience rather than price, with JP Morgan seeing upside with respect to the value proposition once more stores are opened.

Macquarie came away less impressed however, seeing no clear sign of what the Masters brand stood for in the market. Like Citi, Macquarie expects improvement as operations are refined over time.

One issue for Macquarie is that Woolworths doesn't have a core competency in bulky goods, which suggests a higher level of risk in entering the home improvement and hardware market. But the fact Woolworths has a partnership with Lowe's and has acquired Danks to boost its wholesale capabilities reduces this risk in the broker's view.

As JP Morgan points out, early trading at Masters has exceeded expectations. A positive for JP Morgan is the use of a distribution centre model rather than a direct sourcing approach, as while initial fixed costs are higher, gross margins should also be higher. Citi expects long-run gross margins of 35-38% and an EBIT (earnings before interest and tax) margin of 8%.

Woolworths expects to break-even in the Masters chain in 3-4 years, assuming 15-20 new stores are opened annually. Citi takes the view the guidance from Woolworths for a $100 million loss from Masters in FY12 is conservative, as it assumes a slow ramp-up in stores. Early indications from the Braybrook store imply some upside risk.

Citi assumes Masters will eventually generate sales of $3,000 per square metre in its Masters stores, which implies $40 million per store at maturity. This compares to typical sales at a Bunnings store of around $4,000 per square metre.

Post the tour there are no changes in ratings for Woolworths, the FNArena database showing four Buy ratings, three Holds and one Sell recommendation. Price targets are also unchanged, the consensus target standing at $27.68. Targets range from $23.50 to $30.00.

Shares in Woolworths today are higher and as at 2.10pm the stock was up 31c at $24.57. This compares to a trading range over the past year of $23.70 to $30.18. The current share price implies upside of around 12% to the consensus price target in the FNArena database.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

- Brokers pick up coverage on Collins Foods
- Both UBS and Deutsche Bank rate stock as a Buy
- Upside from continued solid same store sales growth
- New store openings, refurbishments should also grow earnings

By Chris Shaw

Collins Foods ((CKF)) is one of Australia's largest restaurant operators, controlling 119 KFC restaurants under franchise agreements and 26 Sizzler Restaurants as the owner of the Sizzler trademark in Australia and in 68 other countries.

Shares in Collins Foods listed on the ASX on August 4 and brokers are now picking up coverage, with both UBS and Deutsche Bank initiating coverage on the stock this week. Both brokers are positive, commencing coverage with Buy ratings.

UBS points out Collins Foods has historically delivered resilient growth, as same store sales growth for KFC has been 5.9% and for Sizzler 6.3% from FY02 to FY11. Refurbishment of stores should see solid growth continue, Deutsche noting 84 of the KFC stores are expected to be refurbished over the next five years. This compares to 19 refurbishments over the past three years.

New store openings should also deliver some growth. According to Deutsche Bank, the franchise agreement under which Collins Foods operates will allow for new store openings of up to seven new stores annually over the next five years. 

UBS agrees, noting management expects to open 25 KFC and nine Sizzler restaurants over the medium-term. This would equate to 24% restaurant growth from current levels, a positive as since 2005 new KFC restaurants have generated average pre-tax return on invested capital (ROIC) of 38%. Refurbishments have generated an average ROIC of 24%.

Deutsche expects this will underpin three to five year capitalised annual growth in earnings per share (EPS) growth of around 10%. Forecasts reflect this, Deutsche expecting EPS for Collins Foods of 27c in FY12 and 30c in FY13.

By way of comparison, UBS is forecasting EPS of 27c and 29c respectively and expects capitalised annual EPS growth of 8% for FY12-FY14. 

Collins Foods should be able to fund this growth, as UBS notes the balance sheet is in solid shape. Fixed charge cover stands at 2.6 times and debt/EBITA (earnings before interest, tax and amortisation) is at 2.1 times. 

The strong balance sheet should also support dividend payouts, UBS expecting Collins Food will have a payout ratio of better than 50%. This implies a FY12 dividend yield of more than 6% on UBS's numbers, fully franked.

On a sum-of-the-parts basis UBS values Collins Foods in a range of $2.77-$3.26. Price target has been set at $3.00, roughly in the middle of this range. Deutsche similarly has a target of $3.00 per share, which is based on the broker's discounted cash flow valuation.

At current levels, Deutsche suggests the valuation of Collins Food is compelling, as earnings forecasts suggest a FY12 earnings multiple of 7.4 times. This is well below the listed ex-100 retailers average of 11.2 times and suggests good relative value in Deutsche's view, especially given the current uncertain economic environment.

The major risk to the story according to Deutsche is delays to roll-outs and refurbishments, while there is also the risk of the franchise agreement with Yum! being terminated. This is viewed as unlikely but cannot be completely discounted.

A strong and experienced management team helps reduce risks to the Collins Foods story, as UBS notes CEO Kevin Perkins has been with the company for 32 years and the top five executives have an average of 26 years service.

Since listing Collins Foods shares have traded in a range of $1.92 to $2.48. As at 10.40am today the stock was 2c higher at $2.05, which suggests significant upside relative to broker price targets.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.