By Jason Fittler
So the float was a dog. It went from $4.10 to $3.15 in 6 months.
This is a case of do not throw out the baby with the bath water. Clearly from the float the stock was over priced and investors were concerned if the company could meet the performance guidance. So far so good and now is the time to get into this stock.
Myer remains a compelling investment case on valuation grounds.
However, with the company on track to ‘comfortably’ meet prospectus profit guidance, we recognise further share price appreciation (from January lows) will likely require confidence in sustainable sales growth, which is more of a 2011 event.
We remain comfortable that sales will be achieved through leverage to the retail up-cycle, new store openings and refurbishment growth.
As a result, we retain our Buy recommendation and A$4.15 target price along with expected dividends of 6% for 2010, 6.98% 2011 and 7.56% in 2012.
Profits positively surprised consensus forecasts.
The key difference was the 159bp reduction in cash as a result of better-than-expected renegotiated terms on cleaning, transport and media distribution contracts, among others. Underlying gross margin improved (34bps) from strong Exclusive Brands sales growth (+20% pcp), partially offset by heavy discounting, the impact of which we estimate at c72bp of gross margin.
Strong operating cash flow benefited from the MyMerch IT system.
Sales expectations for 2010 were downgraded to +1-2% pcp (previously +3.0%), reflecting, in our view, a positive decision to bank margin gains rather than reinvest to drive sales, which we recognise is in part also an acknowledgement of a tougher sales environment.
There is no doubt that this is a long term story, but all the good stocks are nowadays.
I would look to buy Myer for the dividend and expect to see the price move in 2011 as the sale continues to match expectations.
For more information on Myer please call us on 07 4771 4577.