BUY HOLD SELL – Premier Investments (ASX: PMV)
Drawing inspiration from Chris’ Chart of the Day this week following his technical appraisal of retail powerhouse Premier Investments (ASX: PMV). A business that has a strong presence in Australia and New Zealand and is growing into new markets including Singapore and the United Kingdom. The Group’s brands include Smiggle, Peter Alexander, Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti. It also holds a 26% interest in Breville (ASX: BRG) and a 10.8% interest in Myer (ASX: MYR).
The company was a late reporter of its financial results which were released on September 25th, although that didn’t take any lustre away from the $137.8m net profit, up 29% on FY19. The result buoyed by significant online sales growth that has continued into FY21. PMV considers itself well-positioned for the upcoming Black Friday, Cyber Monday and Christmas trading period, with an estimated $52bn of extra consumer purchasing power in the picture thanks to international travel restrictions.
The retailer was also quick to dispel the view its record profit would not have been possible without government subsidies and lower rental costs from the closure of stores. Below is a summary of the recent results.
Revenue $1.25bn vs consensus $1.22bn. Final Dividend 36c, fully franked. Underlying EBIT $187.2m vs guidance of $184.8m-$185.8m. EBIT result includes a $8.7m channel optimisation expense to potentially close up to 350 stores in Australia and New Zealand. Online sales in H2 were up 70% on the prior period and contributed to 25.5% of total sales. Online sales for the first six weeks of FY21 up 92% vs pcp.
The shift to online, accelerated by COVID, has been a boon with the channel delivering a significantly higher EBIT margin than the retail store channel. It is a mixed bag of emotions however, with many of its retail stores suffering from the lockdowns; Smiggle revenue down 16.4% vs FY19 – school closures weighing on the result. To its credit, PMV is not standing idly by whilst the retail restructure takes shape, closing 137 brick and mortar stores in the last seven years and playing hardball with landlords. Provisioning for mass closures in its FY21 results if suitable agreements cannot be reached. ~70% of Premier’s stores in Australia and New Zealand are either in holdover or with leases expiring in 2020. The likelihood of lower/fewer rents in the future gaining momentum. The rental expense in the latest accounts was $205m, down 10% on the previous year’s $228m.
Higher profits and dividends would be the spoils to flow from the business restructure and shift to online, according to chief executive Mark McInnes. PMV also likely to benefit from budget measures with tax cuts and investment poised to filter into more discretionary spending. Kids going back to school another welcome sign for its biggest revenue contributor, Smiggle.
PMV is also pushing for MYR’s entire board to step down following its $11m operating loss and $172m bottom line loss in FY20. Not ruling out engaging the support of other shareholders and pressuring the board to stand aside at the AGM. MYR down ~2% since results which were released at the start of September.
BRG’s results were mostly inline with expectations, the stock up ~10% since results in August. Broker’s pleased by its growth profile and strategy. BRG recently acquired coffee grinder manufacturer, Baraza for $83m. Click here to view our BRG BUY HOLD SELL.
- ROE is satisfactory at 11%, forecast to improve modestly in futures periods.
- Revenue and EPS growth are both positive with EPS expected to outpace revenue growth in FY2, FY3 and FY4.
- A forward PE of 23.6x does not put it in the cheap category. That said, other retailers like LOV and KMD are on PE’s of 41.7x and 15.9x. AX1 on 15.3x.
- A gross yield of 4.6% is attractive given the environment of low rates and deferred dividends.
- Of the ten brokers that follow the company, 40% have a buy or strong buy recommendation. The majority are bullish.
- It is trading on a 6.7% premium to the average broker target price and a 10.4% discount to intrinsic value.
WHAT SORT OF INVESTMENT IS PMV
PMV is a retailer with a growth agenda, boasting nine consecutive years of underlying EBIT improvement. A strong management team to drive its online transformation strategy and an aggressive negotiator, particularly in the rental space, characterise the company. Not to mention a strong balance sheet including a $1bn investment in Breville (BRG) and a 10.8% stake in Myer (MYR). 92.6% of its revenue however comes from its retail operations so that’s really what it all about.
The business is at a significant inflection point as it moves from a high fixed cost brick and mortar retailer to a more diversified and progressive business offering. Its nine years of investment and development in its online channel should see it well placed to take advantage of this significant swing in customer shopping preference. An improving macroeconomic picture especially for discretionary spending, adding to its attraction as the economy recovers from COVID. Accommodative fiscal and monetary policy and the relaxation of COVID restrictions (in Australia) also welcomed by the business.
Macquarie is the most bullish with a price target suggesting upside of more than 8%. Retail earnings came in ahead of expectations. The broker advocating exposure to a diversified retailer with a balance sheet that is net cash and characterised by property-related debt and a $1bn (26.1%) investment in Breville Group (BRG). Sees a favourable margin in the online channel driving earnings growth going forward. Citi sees margins expanding to 15.1% in FY21 from 13.2% in FY19. Pleased by rent reductions and the shift to online. UBS points to disappointment in Smiggle, but remains positive, believing COVID has delayed but not structurally challenged PMV’s strategy. Adds medium term opportunities include the rollout of Smiggle globally, consolidation in apparel and improving online margins. Credit Suisse observe up to 55 UK Smiggle stores could close in FY21 although note management is confident the profit contribution can be maintained.
SHORT TERM TECHNICAL VIEW
Comments from Chris, “an interesting short-term technical pattern reveals layers in the rally from the March lows, with sideways consolidation followed by short, sharp pushes higher. Rarely does a stock rally in a straight line. There are often pullbacks and consolidations, as the bears continue to test the ferocity of the rally. The stock has just printed a fresh, all-time high – albeit on an intraday (as opposed to closing) basis. From here a clear break higher, and then a retest and confirmation of the breakout point as support would be encouraging.” RSI in overbought territory. Candlestick patterns since results suggest 2200c could be the next significant level. A positive price reaction into and through its results another point to mention. We have said many times, results reactions can start new trends and tend to de-risk the company for the next few months.
Not a whole lot going on. The most significant transaction in July with Perpetual Investments (PPT) offloading more than 1.6m shares. Not a great look. Unfortunately, nothing really insightful to take away from the top shareholders.
A notable spike in short interest through the main lockdown period as retail businesses were forced closed, understandable. The overall level of shorting should not be a driver of concern at 0.15%.
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