A mixed bag. Earnings and target price revision. Price catalyst. Catalyst: FY14 results. Action and recommendation

Transcription

1 AUSTRALIA PMV AU Price (at 06:10, 17 Sep 2013 GMT) Neutral A$8.38 Valuation - Sum of Parts A$ month target A$ month TSR % +6.1 Volatility Index Low/Medium GICS sector Retailing Market cap A$m 1, day avg turnover A$m 3.3 Number shares on issue m Investment fundamentals Year end 31 Jul 2013A 2014E 2015E 2016E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x PMV AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2013 (all figures in AUD unless noted) 17 September 2013 Macquarie Securities (Australia) Limited A mixed bag Event PMV reported FY13 NPAT of $174.5m. Results included a one-off accounting reclassification gain. FY13 adj. NPAT of $69.3m was up 1.5% on pcp (Macq E $73.4m). Final dividend was 19cps (Macq E 18cps). Impact The key difference between the result and our forecast was a softer 2H performance from Just Group. Just Group EBIT increased 4% to $83.7m (Macq E $89m). 2H sales declined ~1%, LFL sales appear to have declined ~3% in H2 resulting in 2H EBIT of $27.4m down ~5% on pcp. The large casualwear brands Jay Jays and Just Jeans appear to be the key driver of the profit declines. The performance of these brands remains concerning and new management have again been appointed. New store openings have driven strong sales growth in Peter Alexander and Smiggle. The turnarounds in the womenswear brands appear to be gaining traction with profitability in Portmans, Dotti and Jacqui E reported to have improved. New initiatives outlined with the result were expansion of Smiggle into the UK, acceleration of Peter Alexander growth domestically and $30m of capex and start up investment in a new DC. We are more positive on the chances of success of the Smiggle UK launch scheduled for 2H14 than we were on the Japanese growth strategy it has replaced. New management are targeting 40-50% growth from Peter Alexander in the next three years through more aggressive store rollout and range extension. No outlook commentary or recent trading update were provided. Our FY14 EBITA forecast for Just Group of $88m is up 5% on pcp. We expect continued growth from Peter Alexander and Smiggle and the performances of Jay Jays and Just jeans to again be the key swing factor in the contribution from the mature apparel brands. Earnings and target price revision FY14 and FY15 EPS have reduced by 4%. Underlying earnings downgrades for Just Group are ~7% given we have now equity accounted the BRG investment. TP increased to $8.50 from $7.70. Price catalyst 12-month price target: A$8.50 based on a Sum of Parts methodology. Catalyst: FY14 results Action and recommendation We are attracted to the Smiggle and Peter Alexander growth opportunities. While Just Group should be leveraged to an improvement in the retail environment we remain cautious of the brand relevance and thus sales outlook for the mature apparel brands. Retain Neutral recommendation. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Analysis Fig 1 FY13 Result Snapshot 1H12a 2H12e FY12e 1H13a 2H13e FY13a Change FY13e Change Sales % % EBITDA % % Depreciation % % Amortisation na 0.0 na EBIT % % Net Interest expense % % Pre-Tax Profit % % Tax Expense % % Net Profit % % Reported Earnings % % Adjusted Earnings % % Gross Cashflow % % EPS (Adj/dil) % 46.8 EPS growth % 7.5 EBITDA/Sales 14.0% 10.6% 12.4% 15.6% 9.7% 12.9% 4.0% 13.1% EBIT/Sales 11.7% 8.7% 10.3% 13.6% 7.2% 10.6% 2.8% 11.1% PMV reported FY13 NPAT of $174.5m. Results included a one-off reclassification gain related to the change of accounting for BRG. FY13 NPAT pre the classification change was $69.3m, up 1.5% but below our $73.4m forecast. (Consensus $73.6m). Results included the $3.4m investment gain booked in H1. The key difference between the result and our forecast was a softer 2H performance from Just Group. Just Group EBIT increased 4% to $83.7m (Macq E $89m). 2H sales declined ~1%, LFL sales appear to have declined ~3% in H2 resulting in 2H EBIT of $27.4m down ~5% on pcp. The large casualwear brands Jay Jays and Just Jeans appear to be the key driver of the profit declines. Peter Alexander and Smiggle sales have grown strongly with new store openings while the profit contribution of Portmans, Dotti and Jacqui E are reported to have improved. New initiatives outlined with the result are expansion of Smiggle into UK, acceleration of Peter Alexander growth domestically and increased investment in supply chain initiatives. As a result of major supply chain review PMV has established a new Singaporean DC in partnership with a global logistics partner, reduced the capacity of its NZ DC in July and began development of a new Australian DC in Truganina outside of Melbourne. PMV expect to invest $19m in the purchase and development of the new DC which will be debt funded. A further $8m will be spent on fit out and $3-4m of one off transition costs will be incurred in FY14 as the groups existing NSW and Victorian facilities are closed. Operational costs savings of more than $2m per year are expected to be realised within 3 years. We would hope the savings are significantly greater than $2m to generate adequate returns on the upfront investment. While we recognise the importance of controlling the groups DC infrastructure we do question the need to acquire the land and buildings. Fig 2 Cash conversion soft in 2H $m FY10(a) FY11(a) 1H12(a) 2H12(a) FY12(a) 1H13(a) 2H13(a) FY13(a) EBITDA Operating Cashflow (reported) + Tax Paid Net interest paid Ungeared Pre tax Cashflow Profit to cash Conversion 91.6% 90.8% 87.3% 90.2% 87.7% 104.9% 45.0% 83.7% 17 September

3 Operating cashflow of $89.1m was up on $78.7m pcp. Cash generation benefitted from a reduction in tax paid to $8.5m ($19.0m pcp). Operating cashflow was impacted by a $13m increase in inventories ($84m). The increase was attributed to an earlier and larger August promotional activity. We can t help but think part of the increase relates to the softer 2H winter sales. The balance sheet finished with net cash of $211.2m, up from $171.2m in pcp. Cash on hand of $313.2m, was up $19m. Premier retail debt declined $21m to $102m. The balance sheet remains in a very strong position and one of the key attractions to the group. Fig 3 Result detail 1H12 2H12 FY12 1H13 2H13 FY13 Change Sales % LFL Sales* -7.1% -6.7% -0.9% -1.8% Gross Profit** % Gross margin % 61.6% 60.6% 61.2% 62.8% 61.8% 62.3% 117bps Costs Salaries % % of Sales 22.8% 24.8% 23.7% 23.3% 27.1% 25.1% Rent % % of Sales 20.2% 22.6% 21.3% 20.0% 22.8% 21.3% Advertising & Direct Marketing % % of Sales 1.1% 1.2% 1.2% 1.8% 1.2% 1.5% Other CODB % % of Sales 4.2% 3.6% 3.9% 3.3% 1.8% 2.6% Total op costs % % of sales 48.3% 52.1% 50.1% 48.4% 52.9% 50.5% 40bps Other income % Share of JV profit % EBITDA % Depreciation & Impairment % % of Sales 2.3% 1.9% 2.1% 2.1% 2.6% 2.3% EBITA % Margin 11.8% 7.2% 9.6% 12.7% 7.0% 10.0% Total sales increased 0.9% to $836.5m, but 2H sales declined 1% in absolute terms. LFL sales finished down 1.8% after being down 0.9% in the first 6 months. Gross margin improvement was again the key driver of margin improvement in the result. The 2H margin improvement was impressive given the weak sales environment. Whilst there will be no repeat of the currency tailwinds (downside also protected as FY14 fully hedged) FY14 results are expected to benefit from planning and markdown reduction projects in core brands, DFO profitability improvements and ongoing sourcing initiatives. Growth in the higher margin womenswear, Peter Alexander and Smiggle brands will also assist. CODB was largely flat on pcp but increased 80bp in 2H13 on pcp given the negative sales leverage. It could have been far worse. After increasing in 1H13, advertising and marketing expenditure appears to have again been reigned in through 2H13 declining on pcp. Other expenditure in 2H13 was also well below 1H and pcp. Rental expense was flat half on half and on pcp. Established brands rents are reported to have decreased by 2.4% Results will be benefitting from the provision taken through FY11. Salaries were the big mover up 8% on pcp through 2H13. Total store wages increased 4% throughout the year with established brands store salaries declining by 0.5% 17 September

4 Brand by brand Jay Jays is clearly the problem child in the group. Sales declined 11% to $167m, 2H sales were down ~14%. In two years sales from this brand have declined by nearly $50m. While store numbers have declined ~10% over that period, presumably the most unprofitable stores, sales per average store in the remaining network are down 17%. This brand remains management's main focus. A new product team is now in place and while continuing to report to Collete Garnsey a search is underway for a new brand leader. Just Jeans sales fell 3.3% to $196m, 2H sales declined 4%. Two stores were closed taking the total number of stores to 244. A new GM Matthew McCormack (formerly fashion director at John Lewis) was appointed in August. Results from Jay Jays and Just Jeans continue to be disappointing. Combined they make up over 40% of group sales and close to 50% of total store numbers. They remain the key swing factor in future results. The smaller women s apparel brands appear to be on the improve. Dotti grew sales 7.3% to $108.3m although 2H sales were flat. Online sales are reported to have more than doubled. 5 stores were closed taking the format to 109 stores. Portmans sales increased 2.5% to $107.9m. 2H sales were flat. Strong margin growth was reported from improved sourcing. 3 stores were closed taking store numbers to 102. Jacqui E sales declined 2.3%. 2H sales were flat although LFL sales were reported to be positive. 3 stores were closed taking store numbers to 101. A material profit improvement was reported from this brand. New stores drove strong sales growth in the group s growth brands. Peter Alexander sales increased 17.7% to $100.7m, with 11 new stores opened throughout the year. Total store numbers have increased by 20% in FY12 and 23% in FY13. With further growth reported in online it does suggest sales per average store are down well over 10%. We would expect this cannibalisation as overall brand profitability increase but it is relevant given the growth plans outlined. The new leader ship team at Peter Alexander (Judie Coomber formerly GM of Merchandise at Myer) has outlined plans to grow this business by 40-50% in the next three years (circa $40-$50m of incremental revenue). The growth initiatives include: Six to eight stores are planned to open each year for the next three years; new flagship CBD stores; rollout of a dedicated childrenswear range; continued online and mobile growth; launch of an exclusive Myer relationship including 10 womenswear concessions and wholesale men s and childrenswear in 15 stores. Smiggle s sales increased 14.5% to $89.6m, 2H sales were up 18%. Store numbers increased 14% to 151. If we exclude the Singapore contribution sales per average store in Australia and NZ look to be down ~8% which we expect reflects cannibalisation and lower contributing new stores as the group focuses on growing the overall Aus/NZ profit contribution. Sixteen stores are now trading in Singapore with Singapore sales increasing over 100% to $13.8m. The group will use the Singapore operations to launch into Malaysia. A 6-8 new tore opportunity has been identified with first store likely to open in 2H14. The UK has been identified as the next big international growth opportunity for Smiggle. The potential for a 200 store rollout has been identified with sales and profitability ultimately to exceed Australia if successful. 17 September

5 The first store will open in Westfield Stratford in February stores expected to open through 2H14 with stores per year planned from FY15. Stores are expected to be profitable in year one with the UK profitable from year 2. While any international rollout strategy is not without its challenges, the UK would appear a far easier and arguably more appealing market to take on than the Japanese growth strategy it appears to have replaced. Earnings revisions FY14 and FY15 EPS have reduced by 4%. Underlying earnings downgrades for Just Group are ~7% given we have now equity accounted the BRG investment. FY13 pro forma NPAT is $75m. This included $3.4m of trading gains which we expect will not repeat. Our FY14 EBITA forecast for Just Group of $88m is up 5% on pcp. We expect this growth will be 2H weighted. Fig 4 Price target EBITA Multiple Valuation FY14 High Low High Low Just Group $ Breville Group 25% stake Corporate costs -$ Enterprise Value $ $1,030.5 $947.1 Less Debt -$ $211.2 MV of equity $1,241.6 $1,158.3 Equity value per share $8.00 $7.46 Source: Macquarie Research, September 2013 Our FY14 valuation is detailed above. With roll-forward and increase in market multiples price target has increased to $8.50 from $7.70. We are attracted to the Smiggle and Peter Alexander growth opportunities. While Just Group should be leveraged to an improvement in the retail environment we remain cautious of the brand relevance and thus sales outlook for the mature apparel brands. Retain Neutral recommendation Fig 5 Valuation comparables PER EV/EBITA Div Yield Company Name Price FY14 FY15 FY14 FY15 FY14 FY15 David Jones Fantastic Holdings JB Hi-Fi Kathmandu Myer Specialty Fashion Group Super Retail Group The Reject Shop * Source: FactSet, Macquarie Research, September 2013 * ex cash and BRG 17 September

6 Premier (PMV:$8.30) 17-Sep-13 Interim results 2H/12A 1H/13A 2H/13A 1H/14E Profit & Loss 2013A 2014E 2015E 2016E Revenue Revenue $m EBITDA $m EBITDA $m Depreciation $m Depreciation $m Amortisation of goodwill $m Amortisation of goodwill $m EBIT $m EBIT $m Net Interest expense $m Net interest expense $m Pre-Tax Profit $m Pre-Tax Profit $m Tax Expense $m Tax Expense $m Net Profit $m Net Profit $m Outside equity interests $m Outside equity interests $m Net Abn/Extra $m Net Abnormals/Extra. $m Reported Earnings $m Reported Earnings $m Adjusted Earnings $m Adjusted Earnings $m Gross Cashflow $m Gross Cashflow $m EPS (Adj/dil) c EPS (adj/diluted) c EPS growth % EPS growth % CFPS c PE (adj) x CFPS Growth % CFPS c EBITDA/Sales % CFPS Growth % EBIT/Sales % PGCFPS x Earnings Split % DPS c Revenue Growth % Yield % EBIT Growth % Franking % Profit and Loss ratios 2013A 2014E 2015E 2016E Cashflow Analysis 2013A 2014E 2015E 2016E Revenue Growth % EBIT Growth % Pre-tax Profit $m EBITDA/Sales % Depreciation & Amortisation $m EBIT/Sales % Tax Paid $m Effective tax rate % Gross cashflow $m Payout ratio % Changes in working capital $m EV/EBITA x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales x Acquisitions $m Capex - Plant & Equip. $m Balance sheet ratios Asset Sales $m ROE % Other $m ROA % Investing cashflow $m ROFE % Dividend (ordinary) $m Net Debt $m Equity raised $m Net Debt/Equity % < 0 < 0 < 0 < 0 Other $m Interest Cover x nmf nmf nmf nmf Financing cashflow $m Price/NTA x NTA per share $ Net Change in cash/debt $m EFPOWA m Historical performance 2010A 2011A 2012A 2013A Balance Sheet 2013A 2014E 2015E 2016E Cash $m Revenue $m Receivables $m EBITDA $m Inventories $m Depreciation/Amortisation $m Investments $m EBIT $m Property, plant & equipment $m Net interest expense $m Intangibles $m Pre-Tax Profit $m Other Assets $m Tax Expense $m Total Assets $m Net Profit $m Payables $m Net Abn/Extra $m Short Term Debt $m Long Term Debt $m EPS (adj/dil) c Other Liabilities $m EPS growth % Total Liabilities $m Ordinary DPS c Shareholders Funds $m EBITDA/Sales % Minority Interests $m EBIT/Sales % Total Shareholders Equity $m ROE % ROFE % Total Funds employed $m 1, , , ,656.9 EFPOWA m September

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2013 AU/NZ Asia RSA USA CA EUR Outperform 49.80% 57.68% 48.05% 41.13% 61.75% 47.10% (for US coverage by MCUSA, 8.12% of stocks followed are investment banking clients) Neutral 39.85% 24.45% 42.86% 54.70% 34.42% 30.89% (for US coverage by MCUSA, 6.60% of stocks followed are investment banking clients) Underperform 10.35% 17.87% 9.09% 4.17% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients) Company Specific Disclosures: Risk Disclosure: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerrings by competitors.the results of operations may be materially affected by global economic conditions generally, including conditions in financial markets.the company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 17 September