Myer Ltd (MYR, $3.03, Mkt Cap $1,824M). Unfairly undervalued vs peers. TRADING BUY PT $3.40. •The retailers have performed well year to date with the misery overhanging the sector over the past few years starting to lift as a slew of positive factors have been converging in a perfect storm:
- On the macro level the RBA has progressively cut rates over the past two years, which are finally filtering through to pockets of the economy;
- Retail sales generally proved satisfactory over Christmas if not stellar, while data for January and February has continued to show positive trends;
- The forthcoming Federal election provides hope on the horizon for an electorate that has generally been dissatisfied with the incumbent Government and a preference to save vs spend; and
- Equity markets have improved and confidence is returning to the housing sector.
•On the basis of comparable performance our pick in the retail space is Myer (MYR). The company suffered from negativity surrounding its IPO, listing at a time when the retail environment was worsening. CEO Bernie Brookes has since undertaken various initiatives to improve earnings: reducing costs; rationalising the product mix; improving the service offering; introduction of Myer Exclusive Brands (MEB); and launching an improved internet shopping experience.
•The 1H result indicates each of these initaitives have started to bear fruit. The result showed an improved margin, continuing successive periods of like-for-like sales (outperforming David Jones), and strong growth in MEB (now accounting for circa 20% of sales).
•The stock has rallied strongly but we feel it is too early to say it is now fully priced. MYR is trading at 12.5x forward earnings vs an average of 14.5x for the retailers. While the market is factoring 13% EPS growth for peers in FY14, only 4% is forecast for MYR. We feel this may underestimate the leverage MYR will have to an improving economy and the company’s own internal initiatives.
•We believe MYR should trade at least on 14x PE which would yield a valuation of $3.40. However, this could increase if stronger than anticipated earnings growth is in the pipeline.
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