good time to sell?, page-4

JB Hi Fi (JBH.ASX; $19.93/sh; Mkt Cap $1.9b) – Dick smith IPO could put pressure on JBH – TRADING SELL

•Media reports last week indicated that Anchorage Capital Partners are exploring a potential IPO for Dick Smith Electronics. With advisors appointed, the process towards an IPO could commence imminently.

•Anchorage cheaply acquired Dick Smith from Woolworths for $20m last year and paid an additional $74m this year to buy out of an agreement that would have seen it collect a proportion of the sale proceeds when the electronics business was sold. It appears the company has had success in it’s turn-around strategy and the timing is now opportune to exit their investment.

•We believe the market will want a decent discount for the IPO relative to its peers given PE involvement, which has had a sketchy history of listings such as Meyer, Collins food, etc.

•In Anchorages case we believe the discount will be accentuated given the short period in revamping the business which was bought cheaply coupled with Anchorage potentially wanting to sell its whole stake to exit its investment completely.

•An article in The Australian reported that In a presentation to fund managers this month, Dick Smith boss Nick Abboud said the company had lifted Dick Smith's EBITDA from $60m at the time of the acquisition to $80m.

•Reports indicate that the IPO could be valued at ~$400m which implies an EV/EBITDA multiple of 5 times. It would be very attractively priced considering its most relevant peer JBH is trading at a consensus EV/EBITDA multiple of 8 times FY14.

•We believe the relative discount to JBH, coupled with the element of portfolio adjustments to gain exposure to Dick Smith could put pressure on JBH share price.

•JBH has outperformed the market in the past few months with the stock doubling in value on the back of improving sentiment, solid results and an element of short covering. With the shorts now half what they were 2 months ago the short covering push in the share price appears to have played out. With stock trading at close to broker’s consensus 12 month price targets and the potential listing of Dick Smith we recommend selling JBH at current levels.

http://www.fostock.com.au/announcements/jb-hi-fi-jbh-asx