Premier Investments (PMV)

Transcription

1 4 April 2017 Analyst Sam Haddad Authorisation TS Lim Premier Investments (PMV) The Myers touch Recommendation Buy (unchanged) Price $14.20 Target (12 months) $17.65 (previously $17.50) Expected Return Capital growth 24.3% Dividend yield 3.9% Total expected return 28.2% Company Data & Ratios Enterprise value Market cap $2,178m $2,259m Issued capital 159.1m Free float 61% Avg. daily val. (52wk) $5.4m 12 month price range $ $17.00 GICS sector Price Performance Retailing (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) % Myer stake has strategic merit We believe the primary objective for PMV s 10.8% investment in Myer is strategic in nature. A strategic stake in Myer has merit on a number of fronts, as follows: Serves as a blocking stake ahead of rival (most likely offshore) interested parties; At the same time it allows PMV to keep its options opened (should PMV elect to purse a full takeover of Myer down the track); From the perspective of both Solomon Lew and PMV, it aligns with/helps protect key business interests (Voyager Distributing Company is supplier to Myer; Seed has floor space in Myer; PMV s Just Group is a competitor to Myer, PMV s Peter Alexander concessions in Myer, Myer is a retailer of Breville products); and The investment is timely from a Myer turnaround perspective. We believe a strategic stake has more merit vs pursuing a full takeover. While a full takeover would deliver synergy benefits, we believe the long-term merits for PMV are less compelling given: the increasingly competitive domestic landscape, including the expected arrival of Amazon; the dilutive impact this would have on PMV s high growth scalable Smiggle platform; the fact that Myer is not a vertical retailer (like Just Group) meaning it does not own the brands it retails (and therefore has less brand control and lower gross margin); and the geographic earnings mix shifting back to Australia. Earnings changes & Investment view: Retain Buy, PT $17.65 The inclusion of the Myer investment increases our FY17/FY18/FY19 EPS estimates by 1.7%/2.8%/2.3% (driven by Myer dividend income). Our PT increases from $17.50 to $ For illustrative purposes only, we estimate a full takeover scenario at an EV/EBITDA multiple of x, funded with cash, debt and a capital raising in the region of $500m, would be EPS accretive of ~20% in FY18e post synergies of ~$15m. We believe Smiggle will remain the central growth driver for PMV over the foreseeable future. There is no change to our core investment view on PMV. At an implied FY18 EV/EBITDA of ~9.1x for the Just Group, we believe PMV is undervalued. Buy rating. Absolute Price $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 Mar 15 Sep 15 Mar 16 Sep 16 PMV S&P 300 Rebased SOURCE: IRESS BELL POTTER SECURITIES LIMITED ACN AFSL Earnings Forecast Jul Year end 2016a 2017e 2018e 2019e Just Group Sales (A$m) 1, , , ,403.3 Total Group Revenue (A$m) 1, , , ,411.9 EBITDA (A$m) NPAT (reported) (A$m) NPAT (underlying) (A$m) EPS underlying (cps) EPS underlying growth (%) 17.6% 8.6% 16.1% 15.9% PER (on underlying EPS) (x) EV/EBITDA (x) Dividend ( ps) Yield (%) 3.4% 3.6% 4.2% 4.8% Franking (%) 100% 100% 100% 100% ROE (%) 7.7% 8.4% 9.4% 10.6% SOURCE: BELL POTTER SECURITIES ESTIMATES DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 8 THAT FORM PART OF IT. Page 1

2 Acquires a 10.8% strategic stake in Myer Stake in Myer has strategic merit We believe the primary purpose of PMV s 10.8% investment in Myer is strategic in nature. The investment has merit on a number of strategic fronts, as follows: Serves as a blocking stake ahead of rival (most likely offshore) interested parties; At the same time it allows PMV to keep its options opened (should PMV elect to purse a full takeover of Myer down the track); From the perspective of both Solomon Lew and PMV, it aligns with and helps protect key business interests (Voyager Distributing Company is supplier to Myer; Seed has floor space in Myer; PMV s Just Group is a competitor to Myer, PMV s Peter Alexander concessions in Myer, Myer is a retailer of Breville products); and The investment is timely from a Myer turnaround perspective. We believe a takeover offers less compelling long-term merits We believe a strategic stake has more merit versus pursuing a full takeover. While a full takeover would deliver synergy benefits, we believe the long-term merits for PMV are less compelling given: the increasingly competitive domestic landscape with offshore entrants, including the expected arrival of Amazon; the risk of reviving the department store model in the face of this competition; the dilutive ROIC impact full ownership would have on PMV s high growth, scalable Smiggle platform; the fact that Myer is not a vertical retailer (like Just Group) meaning it does not own the brands it retails (and therefore has less brand control and lower gross margin); and the unfavourable impact this would have on geographic diversification (geographic earnings mix shifting back to Australia). Figure 1 Earnings revisions summary Summary of earnings changes We have included the Myer investment in our model. The net effect is an increase our FY17/FY18/FY19 EPS estimates by 1.7%/2.8%/2.3% (driven by Myer dividend income). Our 12-month price target increases from $17.50 to $ Figure 1 provides a summary of our earnings changes. FY17e FY18e FY19e Old New % Change Old New % Change Old New % Change Revenue $m % % % EBITDA $m % % % EBITDA Margin % 14.3% 14.5% 0.2% 15.0% 15.4% 0.4% 15.4% 15.8% 0.3% Underlying NPAT $m % % % Underlying EPS ps % % % DPS ps % % % SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 2

3 Implied valuation for The Just Group In Figure 2 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. We have now also included PMV s investment in Myer. 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 2 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 (Calculated as "PMV Mkt Cap - Net Cash - BRG Investment") 1, Franking Credit Balance (end-fy16) - (Not included in calc) Implied Multiple for Just Group FY17e FY18e 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 factor to account for equity market risk. SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES We believe The Just Group s implied FY17/FY18 EV/EBITDA multiple of 10.9x/9.1x is undemanding considering the business strong management team, solid growth in key core brands (notwithstanding 1H17 macro issues) and significant medium/long-term growth prospects in Smiggle/Peter Alexander. Furthermore, there is significant upside potential from acquisitions (either integrated as part of, or separate to The Just Group). Page 3

4 As an exercise, how a takeover might look We believe the primary objective of the investment is strategic in nature. However, for illustrative purposes only, in this section we have undertaken an exercise to illustrate how a full takeover might look (price multiple, funding structure & an estimate on EPS accretion). What is an appropriate transaction multiple for Myer? Figure 3 summaries recent transaction EBITDA multiples (historical and first forecast year) for department stores, including David Jones. Figure 3 The Just Group implied valuation multiple analysis Date Target Transaction Consideration EBITDA mulitple (times) (millions) Historical Forecast Department stores - Australia and New Zealand Apr 14 David Jones Ltd Acquisition by Woolworths Holdings Limited A$2,149m 10.4 (includes property) Nov 09 Myer Holdings Ltd IPO of Myer Holdings A$2, Mar 06 Myer Dept Stores Acquisition by TPG-Newbridge Capital A$1, Department stores - North America Sep 13 Neiman Marcus Group Acquisition by Ares Management and Canada US$3, Pension Plan Investment Board Jul 13 Saks Incorporated Acquisition by Hudson's Bay Company US$2, Oct 05 Hudson's Bay Company Acquisition by Maple Leaf Heritage Investments C$1, May 05 The Neiman Marcus Group Acquisition by Private Equity Consortium US$5, Feb 05 The May Department Stores Co. Acqusition by Federated Department Stores US$11, Nov 04 Sears, Roebuck and Company Merger of Sears, Roebuck and Co. and Kmart US$11, Nov 04 Barneys New York Acqusition by Jones Apparel Group US$ Jul 04 Mervyns LLC Acquisition by Investor Group US$1, Jun 04 Marshall Field's Acquisition by The May Department Stores Co. US$3, Department stores - UK and Europe May 11 Gruppo Coin S.p.A Acquisition by BC Partners Aug 06 House of Fraser plc Acquisition by Consortium led by Baugur Group Jun 06 Printemps SAS Acquisition by RREEF America and Borletti Group 1, Mar 05 Societe Anonyme des Galeries Lafayette Acquisition by Moulin Family and BNP Paribas 3, Apr 04 Koninklijke Vendex KBB NV Acquisition by VDXK Acquisition BV 1, Sep 03 Debenhams plc Acquisition by Private Equity Consortium 1, May 03 Selfridges plc Acquisition by Wittington Investments Ltd Department stores - Developed Asia Jan 08 Robinson and Company, Ltd Acquisition by Al-Futtaim Trading Company LLC S$ Average Median Upper end Lower end SOURCE: DAVID JONES SCHEME BOOKLET (DATED 22 MAY 2014) INDEPENDENT EXPERT S REPORT PREPARED BY GRANT SAMUEL & ASSOCIATES Considering the still early stage of the Myer turnaround strategy, the increasing competitive pressures facing Myer (including its exposure to the expected arrival of Amazon), and the relative smaller size of Myer (vs peers in Figure 3), we believe an appropriate EV/EBITDA transaction multiple should be below median of 8.5x (for the first forecast year) and in the region of x. Based on FY17e consensus forecasts, this corresponds to a Myer share price of $1.55 to $1.68 (a premium of circa 35%-45% vs the $1.15 investment stake price). The potential financials for PMV We have assumed PMV would shift to a group level net debt position of circa 1.5x EBITDA (which is broadly comparable to discretionary retailers SUL and JBH). This corresponds to PMV moving to a geared (ND/[ND+E]) balance sheet position of circa 25%. Based on this assumption, we estimate new equity capital in the region of $500m would be required to help fund a full takeover of Myer at x EV/EBITDA. For this exercise we have also assumed that PMV does not sell its investment in Breville. A summary of this scenario is provided in Figure 4. Page 4

5 Figure 4 MYR takeover EV/EBITDA analysis, amount of new equity capital needed EV/EBITDA (on first forecast year) Equivalent MYR share price MYR's EV ($m) Calc. from consensus FY17e EBITDA 6.00 $1.56 $1, x / 26% 1.4x / 24% 1.3x / 22% 6.25 $1.62 $1, x / 27.5% 1.5x / 25.5% 1.4x / 23.5% 6.50 $1.69 $1, x / 29% 1.6x / 27% 1.5x / 25% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Net debt/ebitda / Gearing (ND/(ND+E)) at $450m raise Net debt/ebitda / Gearing (ND/(ND+E)) at $500m raise Net debt/ebitda / Gearing (ND/(ND+E)) at $550m raise Figure 5 summaries the impact this scenario transaction would have on EPS (accretion measured at 100% MYR ownership vs current 10.8% ownership) and fixed coverage ratio in the first full year contribution of MYR (i.e. FY18e). In this analysis we have assumed synergy opportunities of ~$15m from procurement/supply chain efficiency and headcount. New equity capital of $500m is assumed to be raised at a 10% discount to PMV s current share price. Figure 5 Estimate impact on EPS and fixed charge coverage FY18e using BPe (for PMV) and Bloomberg (for MYR) PMV MYR Synergy Debt Costs Combined EBITDA Gross interest costs (using FY16 ) Operating lease expense Fixed Charge Cover FY18e underlying EPS (cps) FY18e EPS accretion to PMV 21% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES As illustrated, our scenario results in EPS accretion in the region of 20% in FY18e, after allowing for synergies. Page 5

6 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 980 Stores in Australia and New Zealand, and over 60 stores in South Africa via a joint Venture. PMV also has a major stake in Breville group (BRG) as well as c$300m 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 $16.32, while our DCF is $18.97 (WACC of 10.7%). We take a simple average to derive our price target. Risks Key downside riskas 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 6

7 Premier Investments as at 4 April 2017 Recommendation Buy Price $14.20 Target (12 months) $17.65 Table 1 - Financial summary Jul Year end e 2018e 2019e Price $14.20 Profit & Loss (A$m) Recommendation Buy Just Group Sales , , , ,403.3 Diluted issued capital (m) Change 5.9% 6.2% 10.7% 6.7% 11.9% 12.0% Market cap ($m) 2,258.6 Other rev/income Target Price (A$ps) $ Total Group Revenues , , , , Change 5.2% 5.9% 10.4% 7.0% 12.1% 11.9% Jul Year end e 2018e 2019e EBITDA Valuation Ratios... Change 4.7% 11.0% 22.7% 8.4% 19.1% 14.6% Underlying EPS ( ps) Deprec. & amort. (21.9) (22.7) (23.9) (26.4) (30.9) (33.8)... % change 13.2% 11.8% 17.6% 8.6% 16.1% 15.9% EBIT PE (on underlying EPS) (x) Net Interest (2.5) (1.8) EV/EBITDA (x) Pre-tax profit EV/EBIT (x) Tax expense (27.6) (28.8) (39.2) (39.5) (45.8) (53.6)... tax rate 30% 28% 30% 29% 29% 29% NTA ($ps) Associates P/NTA (x) Minorities/Prefs Book Value ($ps) Underlying Net Profit Price/Book (x) Change 13.0% 12.5% 17.9% 9.3% 16.2% 15.9% Abs. & extras. (5.3) - - (2.1) - - DPS ( ps) Reported Profit % pay-out 79.4% 90.4% 72.5% 71.3% 71.1% 71.4% Special DPS ( ps) Underlying Net Profit Yield (%) 2.8% 3.6% 3.4% 3.6% 4.2% 4.8% Pro-forma Adjs (BRG accounting change) Franking (%) 100% 100% 100% 100% 100% 100% Adj. Net Profit (pro-forma FY12/FY13) Change 4.4% 12.5% 17.9% 9.3% 16.2% 15.9% Performance Ratios Revenue growth (%) 5.2% 5.9% 10.4% 7.0% 12.1% 11.9% Cashflow (A$m) EBITDA growth (%) 4.7% 11.0% 22.7% 8.4% 19.1% 14.6% EBITDA EBITDA/sales margin (%) 12.3% 12.9% 14.3% 14.5% 15.4% 15.8% Working capital changes (11.8) (4.3) (14.6) (5.1) (8.3) (8.6) EBIT/sales margin (%) 9.8% 10.5% 12.0% 12.1% 12.9% 13.4% Net Interest Expense (2.5) (1.8) Gross cash conversion (%) 74.1% 89.1% 84.3% 98.1% 92.6% 92.5% Tax (13.7) (22.3) (37.8) (52.1) (42.9) (50.3) Free cash-flow yield (%) 2.8% 3.0% 2.6% 3.5% 4.4% 5.1% Other operating items (7.3) ROE (%) 6.0% 6.6% 7.7% 8.4% 9.4% 10.6% Operating Cash Flow ROIC (%) 6.8% 7.3% 8.8% 8.9% 9.7% 10.9% Capex (20.2) (36.1) (45.0) (44.7) (50.5) (56.5) Capex/Depn (x) Free Cash Flow Acquisitions (27.0) (16.5) (0.0) (101.3) - - Net interest cover (x) n/a n/a n/a n/a Disposals Net Debt/EBITDA (x) n/a n/a n/a n/a n/a n/a Dividends paid (60.6) (78.0) (69.0) (80.3) (88.5) (100.7) Net debt/equity (%) -14.9% -13.2% -13.3% -1.6% -2.4% -3.3% Other investing items (53.1) - - Net debt/net debt + equity (%) -17.5% -15.2% -15.3% -1.6% -2.4% -3.4% Equity Debt increase/(reduction) 15.9 (13.8) (11.2) (14.8) Component Contribution Just Group sales rev , , , ,403.3 Balance Sheet (A$m) Other Just Group rev Cash BRG dividend income Receivables Corp./elimin. sales Inventories & WIP Total Revenue (A$m) , , , ,406.1 Other current assets Current Assets Just Group EBIT Receivables Other/corp/elim. EBIT (4.2) (5.7) (7.0) (5.4) (10.1) (11.7) Assoc & investments Total EBIT (ex. Associates) Fixed Assets Intangibles Half yearly (A$m) 1H15 2H15 1H16 2H16 1H17 2H17e Other mom-curr assets Sales revenue Non Current Assets 1, , , , , ,492.2 EBITDA Total Assets 1, , , , , ,868.2 Deprec. & amort. (10.0) (12.6) (12.3) (11.6) (13.0) (13.5) ST and LT debt EBIT Creditors Interest expense Provisions Pre-tax profit Other liabilities Tax expense (21.8) (7.0) (26.8) (12.4) (26.6) (12.8) Total Liabilities tax rate 31% 21% 30% 31% 29% 28% Net Assets 1, , , , , ,462.5 Associates Share Capital Minorities Reserves (2.4) Underlying Net Profit Retained Earnings Abs. & extras (2.1) - Shareholders Equity 1, , , , , ,462.5 Reported Profit Outside Equity Interests Total Equity 1, , , , , ,462.5 Net debt/(cash) $m (193.8) (176.9) (177.4) (22.0) (33.1) (47.9) SOURCE: BELL POTTER SECURITIES ESTIMATES Page 7

8 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 Jonathon Higgins Title/Sector Head of Research Phone tslim shaddad jhiggins Hold: Expect total return between -5% Chris Savage csavage and 15% on a 12 month view Jonathan Snape jsnape 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. TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Associates Hamish Murray Tim Piper Banks/Regionals Diversified Resources Resources Associate Analyst Associate Analyst tslim lsotiriou parden dcoates hmurray tpiper Such investments may carry an 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 arraignment 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 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 8