Premier Investments (PMV)

Transcription

1 16 March 2018 Analyst Sam Haddad Authorisation Tim Piper Premier Investments (PMV) Key growth pillars all strong Recommendation Buy (unchanged) Price $15.27 Target (12 months) $17.20 (previously $16.90) GICS Sector Retailing Expected Return Capital growth 12.6% Dividend yield 3.9% Total expected return 16.5% Company Data & Ratios Enterprise value Market cap $2,387m $2,426m Issued capital 158.8m Free float 61% Avg. daily val. (52wk) $4.7m 12 month price range $ $15.47 Price Performance (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Absolute Price $18.0 $17.0 $16.0 $15.0 $14.0 $13.0 $12.0 $11.0 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18 PMV S&P 300 Rebased SOURCE: IRESS BELL POTTER SECURITIES LIMITED ACN AFSL Online achieving significant growth, CODB/sales leverage PMV announced underlying 1H18 NPAT of $78.8m, 6.5% up on pcp. The Just Group EBIT of $102.5m was in line with our $103.4 estimate. The result key highlights are: Smiggle continues to grow strongly, shortly to enter Continental Europe: Smiggle continued to achieve strong global LFL sales growth. Including 35 new stores, Smiggle global sales lifted 26.7% to $170.7m (inline vs BPe). In the UK 23 stores were opened with another 7 to 17 openings targeted in 2H18. There were 4 store openings in Australia, 2 & 3 store openings in Malaysia/Hong Kong, and 3 in Ireland. Smiggle is expected to enter the Netherlands in 2QFY19. Peter Alexander tracking ahead of 2020 growth plan: Peter Alexander sales increased 15.0% to $114.4m (inline vs BPe) underpinned by strong LFL growth and 11 store openings. New plus-size range achieved significant growth in 1H18 with Bath & Body and extended Childrenswear range expected to launch in April Peter Alexander is well on track to exceed its $250m sales target by FY20. Online sales achieving significant growth, $100m in sales to be reached in 2018: Online sales, which is significantly higher EBIT margin vs group average, increased 71.2% on pcp to $56.0m. Online is now expected to deliver the original CY20 sales target of $100m in CY18, 2 years ahead of schedule. The significant traction in online clearly demonstrates PMV s leading omni-channel capabilities. Strong operating leverage coming through: CODB/sales decreased 144bps, more than offsetting softer gross margins (due to the competitive environment). The opex leverage reflects a more profitable store mix (note Smiggle salary/sales significant lower vs ANZ group average), online growth and centralised functions. Earnings changes & Investment View: Retain Buy, PT $17.20 There is no material changes to our FY18-FY20 EPS estimates. However time creep & minor model adjustments increases our PT from $16.90 to $ The key takeaway from the result is the continued strong growth across all three key growth pillars, with growth in the online channel particularly strong. At an implied FY18/FY19 EV/EBITDA of ~11.2x/~9.7x for the Just Group, we retain our Buy rating on the stock. Earnings Forecast Jul Year end 2017a 2018e 2019e 2020e Just Group Sales (A$m) 1, , , ,429.8 Total Group Revenue (A$m) 1, , , ,437.3 EBITDA (A$m) NPAT (reported) (A$m) NPAT (underlying) (A$m) EPS underlying (cps) EPS underlying growth (%) 4.1% 8.1% 16.3% 16.1% PER (on underlying EPS) (x) EV/EBITDA (x) Dividend ( ps) Yield (%) 3.5% 3.7% 4.1% 4.6% Franking (%) 100% 100% 100% 100% ROE (%) 8.0% 8.7% 9.9% 11.0% SOURCE: BELL POTTER SECURITIES ESTIMATES DISCLAIMER: THIS REPORT MUST BE READ WITH THE DISCLAIMER ON PAGE 7 THAT FORMS PART OF IT. Page 1

2 The Just Group 1H18 EBIT in line vs BPe Figure 1 - Actual vs expected summary Headline result PMV announced an underlying 1H18 NPAT of $78.8m (bs BPe $81.4m), up 6.5% on pcp. An interim fully franked dividend of 29cps was declared (pcp: 26cps). The Just Group achieved 1H18 underlying EBIT of $102.5m in line with our $103.4m estimate (not shown in Figure 1), and up 10.2% vs pcp. The increase on pcp was driven by both retail sales growth of 7.0% (again not shown in Figure 1), which included constant currency LFL sales growth of 2.4% (cycling 2.1%), as well as retail EBIT margin expansion of 47bps (driven by lower CODB, partially offset by lower gross margin) to 16.3%. Smiggle continued to achieve strong global LFL sales growth. In the UK, the Smiggle store network expanded by 23 stores to 125 at end-1h18, with a further 7 to 17 stores openings flagged in 2H18. In Malaysia/Hong Kong/Ireland, 2/3/3 stores opened respectively, taking the store count to 13/13/5. PMV plans to enter the Netherlands in 2QFY19, with Belgium to follow during CY2019. Actuals History Actual Expected Actual vs 1H16 2H16 1H17 2H17 1H18 1H18e Expected Just Group Sales , % % - Growth (pcp) 4.2% 4.1% 4.1% 7.0% Total Revenue , % % - Growth (pcp) 4.4% 4.0% 4.2% 7.2% EBITDA % %-Margin 17.8% 10.2% 14.3% 17.5% 10.3% 14.2% 17.9% 17.5% 0.4% % - Growth (pcp) 2.6% 5.3% 3.5% 9.5% Depn & Amort % EBIT % %-Margin 15.6% 7.8% 12.0% 15.3% 7.7% 11.8% 15.7% 15.4% 0.4% % - Growth (pcp) 2.3% 3.0% 2.5% 10.1% Net Interest Profit before Tax % Tax Associates/Minorities % Underlying NPAT % %-Margin 12.6% 6.7% 9.9% 12.5% 6.9% 9.9% 12.5% 12.4% 0.1% % - Growth (pcp) 3.4% 7.2% 4.6% 6.5% Abnormals post tax Reported NPAT % DPS ( ps) The core brands achieved mostly positive 1H18 results, as follows: Larger brands: Jay Jays slight positive LFL sales growth; Just Jeans LFL cycled strong comps (pcp: +4.7) and was down -3.6%, although has returned to growth in the first 6 weeks of 2H18. Smaller brands: Portmans and Jacqui-E achieved a strong turnaround in LFL sales performance. Dotti weak, down -7.8% and continues to experience tough competition. As previously noted, management is taking a hard line on rental terms (as leases mature) and is prepared to close stores if incentives from landlords do not improve. This is especially the case in the youth fast fashion category (i.e. for Dotti) where landlords have Page 2

3 Net Debt (-ve) / Net Cash (+ve) provided more favourable terms to new international entrants. During the half PMV closed 10 stores across the group (net store openings totalled 43 stores across the group). Balance sheet and cashflow PMV has a strong balance sheet with net cash at hand (Figure 2). As at end-1h18 net cash stood at $38.9m which includes $185.5m in free cash held by PMV, $77.6m debt at the Just Group level that is non-recourse to PMV, plus $69m in borrowings secured by two mortgages over the recently acquired DC ($19m) and head office building ($50m). The reduction in net cash vs pcp reflects PMV s $100.4m investment in Myer (~10.8% stake). Return metrics at first glance appear low (Figure 3), although this in part is attributed by the significant lift in retained earnings arising from the ~$791m pre-tax gain on the Coles Group Limited disposal in FY07. Dilution is also attributed to the part equity-funded acquisition of Just Group in. Looking forward we expect return metrics will continue to improve alongside growth in Just Group earnings. A step-up is also likely if a material acquisition is made with either no or limited new equity capital funding support. Figure 2 Net cash/net debt group balance sheet position Figure 3 - Return metrics % 10% 8% 6% 4% 2% 0% ROIC ROE Cash flow metrics are sound as illustrated by PMV s healthy 80%-100% gross cash flow conversion in Figure 4. Figure 5 charts PMV s free cash realisation. Figure 4 EBITDA to cashflow conversion Figure 5 - Free cash realisation 120% % 100% % 80% 60% % 50% 40% 40 0% 20% 0% 0-50% Free cashflow ($m) - LHS Free Cash Realisation (%) - RHS Earnings revision summary There is no material (<3%) changes to our FY18/FY19/FY20 EPS estimates. However time creep and minor model adjustments increases our 12-month price target from $16.90 to $ Figure 6 provides a summary of our forecast changes for FY18-FY20. Page 3

4 Figure 6 Earnings revisions summary Old New % Change Old New % Change Old New % Change Revenue $m % % % EBITDA $m % % % EBITDA Margin % 14.5% 14.5% 0.0% 15.3% 15.1% -0.2% 16.2% 16.0% -0.2% Underlying NPAT $m % % % Underlying EPS ps % % % DPS ps % % % Implied valuation for The Just Group In Figure 7 we derive the implied EBITDA multiple beginning with PMV s current market capitalisation. We treat PMV s associate holding in BRG as an investment available for sale for this exercise. Our value for PMV s BRG and MYR investments are based on their market trading value minus an estimate of deferred tax liability, post a 5% discount to account for equity market risk. Figure 7 The Just Group implied valuation multiple analysis $'m $/share Premier Investments - Market Cap 2, Less net cash/add net debt Breville Group - Investment Myer Group - Investment Implied Value of Just Group (Calc. = "PMV Mkt Cap - Net Cash - BRG/MYR Investment") 1, Franking Credit Balance (end-) - (Not included in calc) Implied Multiple for Just Group Just Group EBITDA EBITDA Mulliple BRG/MYR value is calculated based on its market trading value minus deferred tax liability (estimate) and post a 5% discount We believe The Just Group s implied FY18/FY19 EV/EBITDA multiple of 11.2x/9.7x is undemanding considering the business strong management team, solid growth in key core brands (notwithstanding macro challenges) and significant long-term growth prospects in Smiggle/Peter Alexander/online. Furthermore, there is upside potential from acquisitions (either integrated as part of, or separate to The Just Group). Page 4

5 Premier Investments Company Description Premier Investments (PMV) is an investment company whose major investment is in clothing retailer Just Group. Just Group operates specialty retail brands Just Jeans, Jay Jays, Portman s, Jacqui E, Peter Alexander, Dotti and Smiggle. Just Group currently operates over 1,200 stores globally including approximately 60 stores in South Africa via a joint Venture. PMV also has major stakes in Breville group (BRG) and Myer Holdings (MYR) as well as c$170m in cash excluding non-recourse debt held within the Just group. Investment Strategy PMV aims to maximise long term growth in capital returns to shareholders through being an owner/manager of Australian focused companies with a particular concentration on the areas of retailing, importing and distributing. We believe PMV s strategy will succeed in the face of increasing competition from global brands in fast-fashion retailing. A key potential catalyst remains the utilisation of their cash and franking credits in the form of an acquisition or capital management. We have a BUY recommendation. Valuation Our blended 12-month PT is $ Our SOTP (EV/EBITDA basis) is $16.20, while our DCF is $18.19 (WACC of 10.7%). We take a simple average to derive our price target. Risks Key downside risks to our valuation include (but are not limited to): Slowdown in consumer spending and rise in unemployment - Just Group s product portfolio is mainly clothing and accessories which are highly discretionary items. Rising competition from international peers Impingement of market share arising from increased competition from global retailers such as Zara, Top Shop and H&M. Brand positioning and product offering It is crucial to keep up with the latest fashion trends and right product mix for the targeted customer group. Failure to do so can result in declining sales and loss of customer loyalty. Unseasonal weather Unseasonal weather results in a miss-match between in-store product offering and weather conditions, reducing demand. Online retailing The increased acceptance of internet based shopping remains a competitive risk issue. We believe PMV has suitably addressed this risk through its omni-channel capabilities. Movements in the foreign exchange rates - PMV directly imports 60% to 70% of their products from overseas. The greatest currency sensitivity is to the AUD/USD. Supply chain risks Fast-retailing is highly dependent on efficiently getting product to market. Delays in supply chain could result in product missing key seasonal periods. Management risk - Loss of Just Group Management. Key person risk in PMV Chairman, Solomon Lew who has substantial retail experience. Store rollout changes This could impact our incremental revenue/earnings forecast. Acquisition risk Potential oversights during the due diligence process, strategic fit with broader PMV portfolio, integration risk and multiple paid. Page 5

6 Premier Investments as at 16 March 2018 Recommendation Buy Price $15.27 Target (12 months) $17.20 Table 1 - Financial summary Jul Year end e 2019e 2020e Price $15.27 Profit & Loss (A$m) Recommendation Buy Just Group Sales , , , , ,429.8 Diluted issued capital (m) Change 6.2% 10.7% 4.1% 8.2% 10.1% 9.8% Market cap ($m) 2,425.5 Other rev/income Target Price (A$ps) $ Total Group Revenues , , , , , Change 5.9% 10.4% 4.2% 8.5% 10.2% 9.8% Jul Year end e 2019e 2020e EBITDA Valuation Ratios... Change 11.0% 22.7% 3.5% 10.8% 14.6% 16.3% Underlying EPS ( ps) Deprec. & amort. (22.7) (23.9) (26.1) (27.1) (30.7) (35.7)... % change 11.8% 17.6% 4.1% 8.1% 16.3% 16.1% EBIT PE (on underlying EPS) (x) Net Interest (0.1) (2.5) (1.7) (1.6) EV/EBITDA (x) Pre-tax profit EV/EBIT (x) Tax expense (28.8) (39.2) (35.5) (41.3) (47.6) (55.9)... tax rate 28% 30% 27% 29% 29% 29% NTA ($ps) Associates P/NTA (x) Minorities/Prefs Book Value ($ps) Underlying Net Profit Price/Book (x) Change 12.5% 17.9% 4.6% 8.2% 16.3% 16.1% Abs. & extras. - - (3.5) (0.2) - - DPS ( ps) Reported Profit % pay-out 90.4% 72.5% 76.9% 76.8% 72.5% 69.8% Special DPS ( ps) Underlying Net Profit Yield (%) 3.3% 3.1% 3.5% 3.7% 4.1% 4.6% Pro-forma Adjs (BRG accounting change) Franking (%) 100% 100% 100% 100% 100% 100% Adj. Net Profit (pro-forma /) Change 12.5% 17.9% 4.6% 8.2% 16.3% 16.1% Performance Ratios Revenue growth (%) 5.9% 10.4% 4.2% 8.5% 10.2% 9.8% Cashflow (A$m) EBITDA growth (%) 11.0% 22.7% 3.5% 10.8% 14.6% 16.3% EBITDA EBITDA/sales margin (%) 12.9% 14.3% 14.2% 14.5% 15.1% 16.0% Working capital changes (4.3) (14.6) (25.9) 13.7 (17.9) (8.7) EBIT/sales margin (%) 10.5% 12.0% 11.8% 12.2% 12.7% 13.5% Net Interest Expense (2.5) (1.7) (1.6) Gross cash conversion (%) 89.1% 84.3% 87.1% 101.7% 86.6% 91.2% Tax (22.3) (37.8) (51.4) (59.1) (45.3) (53.3) Free cash-flow yield (%) 2.8% 2.4% 2.1% 3.5% 3.8% 5.0% Other operating items ROE (%) 6.6% 7.7% 8.0% 8.7% 9.9% 11.0% Operating Cash Flow ROIC (%) 7.3% 8.8% 8.5% 8.8% 9.9% 11.1% Capex (36.1) (45.0) (47.6) (45.0) (48.9) (53.6) Capex/Depn (x) Free Cash Flow Acquisitions (16.5) (0.0) (102.4) Net interest cover (x) n/a n/a 1, Disposals Net Debt/EBITDA (x) n/a n/a 0.0 n/a 0.0 n/a Dividends paid (78.0) (69.0) (80.4) (88.4) (93.7) (105.8) Net debt/equity (%) -13.2% -13.3% 0.2% -0.1% 0.0% -1.0% Other investing items (47.8) Net debt/net debt + equity (%) -15.2% -15.3% 0.2% -0.1% 0.0% -1.1% Equity Debt increase/(reduction) (13.8) (15.5) Component Contribution Just Group sales rev , , , , ,429.8 Balance Sheet (A$m) Other Just Group rev Cash MYR dividend income Receivables Corp./elimin. sales Inventories & WIP Total Revenue (A$m) , , , , ,437.3 Other current assets Current Assets Just Group EBIT Receivables Other/corp/elim. EBIT (5.7) (7.0) (6.6) (5.5) (7.1) (9.0) Assoc & investments Total EBIT (ex. Associates) (A$m) Fixed Assets Intangibles Half yearly (A$m) 1H16 2H16 1H17 2H17 1H18 2H18e Other mom-curr assets Sales revenue Non Current Assets 1, , , , , ,483.8 EBITDA Total Assets 1, , , , , ,899.2 Deprec. & amort. (12.3) (11.6) (13.0) (13.1) (13.7) (13.4) ST and LT debt EBIT Creditors Interest expense (1.0) (1.9) (0.6) Provisions Pre-tax profit Other liabilities Tax expense (26.8) (12.4) (26.6) (8.9) (28.8) (12.6) Total Liabilities tax rate 30% 31% 29% 23% 29% 28% Net Assets 1, , , , , ,451.6 Associates Share Capital Minorities Reserves 32.2 (2.4) (30.1) (27.8) (27.8) (27.8) Underlying Net Profit Retained Earnings Abs. & extras. - - (2.1) (1.4) (0.2) - Shareholders Equity 1, , , , , ,451.6 Reported Profit Outside Equity Interests Total Equity 1, , , , , ,451.6 Net debt/(cash) $m (176.9) (177.4) 2.8 (1.5) 0.2 (15.2) SOURCE: BELL POTTER SECURITIES ESTIMATES Page 6

7 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad Chris Savage Title/Sector Head of Research Phone tslim shaddad csavage Hold: Expect total return between -5% Jonathan Snape jsnape and 15% on a 12 month view Tim Piper tpiper Sell: Expect <-5% total return on a 12 month view John Hester Tanushree Jain Financials Healthcare Healthcare/Biotech jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an TS Lim Lafitani Sotiriou Peter Arden David Coates Duncan Hughes Analysts James Filius Alexander McLean Banks/Regionals Diversified Financials Analyst Analyst tslim lsotiriou parden dcoates dhughes jfilius amclean exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Securities Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 7