Pt 66

Morningstar commentary post results
No-moat Myer’s underlying net profit after tax of AUD 40 million in the first half was in line with our estimate and company guidance provided in February 2018. Our underlying fiscal 2018 EPS forecast of AUD 0.05 and our AUD 0.66 fair value estimate are unchanged, with shares screening as undervalued. Key news items in the results announcement were the size of the anticipated impairment and the suspension of the dividend. The noncash impairment of AUD 525 million before tax was within the AUD 600 million of headroom Myer previously had against its minimum shareholders’ funds covenant level and leaves the company within all its debt covenants. Refinancing negotiations have commenced on the debt facilities expiring in August 2019. Although the risk remains that Myer could write down its intangible assets again or breach its fixed-charge coverage ratio at year-end fiscal 2018, we expect the company to have concluded negotiating new debt facilities with more lenient covenants by then--albeit also with higher financing costs. Myer’s board decided not to pay an interim dividend. We now expect the final dividend to be suspended too, before dividends are reintroduced in fiscal 2019 at a 60% payout ratio. Further, uncertainty regarding the company’s strategy following former CEO Richard Umbers’ departure is likely to overhang the share price. We expect Myer's removal of these two key uncertainties in the near term, by refinancing its debt facilities and appointing a new CEO and clarifying the future strategic direction of the company, to be catalysts in closing the gap between the current share price and our intrinsic assessment. Total sales of AUD 1,720 million, a decline of 3.6% on the previous first half, and the strong online sales growth rate of 49% had been pre-released. Gross margins contracted by 73 basis points, mainly due to price-cutting and lower supplier rebates, but also as a result of higher shrinkage.
Last Close Price: $0.42
Morningstar Recommendation: Accumulate