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Kalkine Daily 11/02/2015 + Kathmandu

Feb 10, 2015

In today’s daily we have covered stock research on Kathmandu (HOLD).








 

The S&P 500 was up by 18.84 points or 0.92% to 2065.58 on Tuesday. U.S. stocks rose on Tuesday on hopes that Greek debt negotiations could result in a deal to stabilize Europe and stocks such as Apple boosted indexes, although a drop in energy shares and oil prices limited the advance. The European Commission said there was no formal proposal for resolving Greece's debt problems, although talks were intensive ahead of a series of meetings of euro zone finance ministers and EU leaders in Brussels. 

The possibility of a deal that could avert a Greek exit from the Eurozone — even if it should prove only temporary — was enough to bolster the country’s recently battered banking stocks. National Bank of Greece leapt more than 20 per cent and Bank of Piraeus climbed 15.6 per cent as the Athens General index rose 8 per cent. The yield on Greece’s three-year government bond fell 163 basis points to 19.46 per cent, according to Bloomberg data. The reports helped bolster sentiment more broadly, with the FTSE Eurofirst 300 equity index reversing an early fall to close 0.6 per cent higher.




FTSE Eurofirst 300 Daily Chart (Source – Thomson Reuters)

S&P ASX 200 was down  by 14.3 points or 0.25% on Tuesday and closed at 5800.6 points. The big four banks led the loss on Tuesday, with Commonwealth Bank of Australia losing 0.4 per cent to $92.59. Westpac Banking Corp fell 0.7 per cent to $36.81, Australia and New Zealand Banking Group dropped 0.2 per cent to $34.90, and National Australia Bankdeclined 0.5 per cent to $37.03. Suncorp Group lost 2.6 per cent to $14.42 as investors awaited its earnings result.

Resources giant BHP Billiton gained 0.5 per cent to $31.39, while its main rival Rio Tintogained 0.7 per cent to $60.70 ahead of its earnings report on Thursday. Iron ore minerFortescue Metals Group fell 0.4 per cent to $2.49. Australia's biggest oil producer WoodsidePetroleum lost 1.3 per cent to $35.20. Telstra Corporation remained steady, closing at $6.51. Law firm Slater & Gordon was the best performing stock in the ASX 200, climbing 8.6 per cent to $7.18, after announcing a net profit of $33.73 million, an increase of 46.8 per cent on the first half of 2014, and acquisition of two British law firms. 

 


Slater & Gordon Daily Chart  (Source – Thomson Reuters)

 
Top Performers on the ASX 200 were :-

 


 

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Kathmandu Video



 

Kathmandu (Hold)

A recent preliminary trading update for 1H15 by Kathmandu Holdings Limited (KMD) has indicated a downfall in margins. The Company reported EBITDA forecast to be in the range of NZ$6-$7mn which is 70-73% below on pcp of NZ$22.6mn. EBITDA margin dipped to circa 3.5% from 13.5% in pcp. A loss of -NZ$1.0mn to -NZ$2.0mn is expected for NPAT. The main culprit behind this appears to be the poor opex leverage along with condensed gross margins. Total sales for the Company are up by 6.9%. This update is consistent with the update provided in December 2014. However, LFL sales and gross margin deterioration has hastened over January 2015. KMD’s 2Q15 performance has been affected by clearance activity in 1Q15. The trading conditions in New Zealand have worsened over the Christmas and New Year trading period. The Company appeared to witness a little muddled period of promotional events. The extended discounting period affected the consumer spending with regards to the Christmas sales promotion. It is found that the consumers may not be captivated to purchase during promotional activities. There has been a lower than expected demand for higher margin summer and non-technical apparel categories. Cold weather apparel categories were also affected by warmer weather in New Zealand after Christmas.



Online % of Sales (Source – Company Reports)

Owing to the improvements in inventory management systems, the inventory levels at the end of the period were expected to be down on the pcp despite lower than expected revenues.

It is however to be born in mind that the Company still appears to have long-term offshore market growth opportunities. This coupled with the benefits emanating from a vertical model gives some potential room for growth although the outlook for the near-term growth may not look very appealing.

Factors which may weigh-in entail favorable weather conditions during trading periods, the strength of the brand, and a favorable movement in foreign exchange. At the same time, high level of competition may be hazardous for sales growth and may lead to excessive discounting. Then a lull in consumer spending may be another factor to ponder upon along with unfavorable weather patterns. However, most of the external factors appear to be cyclical which KMD has witnessed over the years. The Company needs to closely look at the cost structure and the roll-out of new stores at a time when there are increases in rental and other variable costs. The reevaluation of sales and pricing strategy, and CEO transition are few aspects yet to be watched closely to understand the impact in the near future. Further, success in the UK and recovery of sales and margin in Australia may help KMD regain the thrust in a better manner.



Optimising Existing Store Network (Source – Company Reports)

The peak 2H sales periods typically contributing about 60-70% of FY profit will be eyed with an expectation of better performance. A better trading condition with lesser fuel prices, lower interest rates and favorable seasonal patterns can work in favor of the Company given there is an improvement in execution as well. KMD has not provided full year earnings guidance in view of the thought that June and July are the Company’s most significant and historically most profitable trading periods, and an outcome therefrom is too early to be assessed at the moment.


KMD Daily Chart (Source - Thomson Reuters)

Based on the foregoing, we put a HOLD recommendation for the stock at the current price of $1.36.
 

Team Kalkine

Level 13  167 Macquarie Street
Sydney NSW 2000 Australia
E-Mail - [email protected]
Phone - 02 8667 3147


        
Note - You can also view this daily in the special reports section.

 


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