Myer Holdings review since listing
Myer Holdings Ltd (ASX: MYR) chief executive Bernie Brookes lamented that the public float of Myer was too early and that he would have preferred to complete the 50-month turnaround program before putting up the ‘for sale’ sign. His comments defiantly point to the trigger-happy exit of the private equity owners who foisted Myer onto the public before the shop floor was ready.
“For those investors who were prepared to wait and pay a more appropriate price for the growth, the upside now looks much more appealing”
Fat Prophets initially recommended buying MYR at $3.25 in February 2010 (FAT461). On the charts, Myer Holdings touched an all time low of $3.12 on February 5. Since then, a short-term uptrend has formed as evident from the series of higher lows and higher highs on the daily chart. The recent high of $3.54 on March 11 represents a gain of 29 cents or 8.9% since our original recommendation a month ago.
Myer Holdings is currently consolidating above the 50 day SMA, which is a bullish signal. Downside risk is limited to this moving average, whereas a break of the $3.54 high will result in another move higher. The initial target is the January 5 high of $3.70.
The timing of the float was indeed fuelled by the adrenaline rush of the government cash stimulus payments in early 2009 that pumped up most retailers’ tills throughout the year. TPG, the majority owner of the company at the time, saw the opportunity to exit its position ahead of schedule. In layman’s terms, they were feeding the ducks. The lure of Australia’s largest IPO of the year, and an iconic brand, was a big temptation for many.
But as Mr Brookes admitted, there was still a lot of work to do before the turnaround of the business would be complete. Not the least of these issues was the refurbishment of the company’s flagship store in Melbourne’s CBD. At approximately $220 million of sales before refurbishment began, the project will only be ready for the Christmas trading period in 2010. Mr Brookes knows that this key piece of kit in his sales bag will produce over $300 million of sales each year once it is fully rebuilt.
With hindsight, the hurried exit of the private equity owners, together with the incomplete turnaround project presented patient investors with a nice opportunity. The secret, of course, was to wait for the price to reflect the reality of the glass half full business (FAT448).
In addition to Melbourne, Myer will open new stores this year in Top Ryde in Sydney (July) and Robina in Queensland (October). Both stores will contribute around $30-40 million in sales in their second year when fully up to speed.
During the half year, Myer refurbished stores in Blacktown, Castle Hill and Northland. The track record of these projects is unquantified by the company other than to reassure investors that once completed, they trade well above previous levels.
The company’s hurdle rate of return for capital expenditure is to double its cost of capital in year two. On a total capital expenditure budget of $230 million over the 2010 and 2011 financial years that suggests the momentum in operating earnings is strongly driven by these new store openings and refurbishment projects. In that period, about $139 million of the total is allocated to store network expenditure.
Stores to be refurbished in the second half of this financial year include Canberra, Charlestown (NSW), Marion (SA) and Eastland (VIC). In the last 3½ years, Myer has refurbished 10 stores.
As we already knew from Myer’s sales release in February ( FAT461), the company’s sales experience had been a choppy one throughout the six month period. Total sales growth of 2% and comparable store sales growth of just 1.2% was a fairly subdued outcome considering the hype that had preceded the IPO. Members may recall the Australian Bureau of Statistics data that recorded annualised retail sales growth as high as 7.9% in June 2009 and comfortably above 5% prior to the float in November. The latest official ABS data now has retail sales at a more sedate growth rate of 3%.
The real culprit in the bubble of those retail figures was, of course, the effect of the government’s cash stimulus payments. Myer was clearly a beneficiary of that money, but now its effect is washing through, the prognosis is looking more sober.
In fact, Myer’s Prospectus contained a sales growth rate forecast for the 2010 financial year of 3% but has now downgraded this to between 1-2%. The company expects second half sales growth of 0-2%.
The good news is that the profit forecasts remain intact, mainly due to the extensive improvement in the cost of doing business. In the first half year result, Myer lowered this factor by 1.59% or about $19 million. Myer has a long list of projects that will make further contributions to reducing the cost of running the business.
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