Company Overview: Premier Investments Limited is an Australia-based company, which operates a range of specialty retail fashion chains within the specialty retail fashion markets in Australia, New Zealand, Singapore, the United Kingdom, as well as Malaysia and Hong Kong. The Company also has investments in listed securities and money market deposits. The Company operates in two business segments: investments and retail. The Company's retail segment includes a range of specialty retail fashion chains. The Company's investments segment represents investments in securities for both long and short-term gains, dividend income and interest. The Company offers brands, including Smiggle, Peter Alexander, Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti. The Company also offers brands, which include Breville, Kambrook and Sage by Heston Blumenthal. The Company's subsidiaries include Kimtara Investments Pty Ltd, Premfin Pty Ltd, Springdeep Investments Pty Ltd and Prempref Pty Ltd.
 

PMV Details

PMV’s Consolidated Balance Sheet Remains Resilient: Premier Investments Limited (ASX: PMV) is engaged in the business of operating numerous specialty retail fashion chains within specialty retail fashion markets in Australia, New Zealand, Asia and Europe. Also, it has significant investments in the listed securities as well as money market deposits. As on May 20, 2019, the market capitalisation of Premier Investments stood at $2.65 billion. It had released its results for the half year ended January 26, 2019 or 1H FY 2019 in which it recorded net profit after income tax amounting to $88.8 million reflecting a rise of 13.01% on previous corresponding period. Premier Retail was the primary contributor to the company’s operating results for half-year. During 1H FY 2019, the retail segment posted total revenue and other income amounting to $680.6 million reflecting a rise of 7.89% over previous corresponding period. The company’s profit before income tax for retail segment witnessed a rise by 11.74% and stood at $111.0 million for 26 weeks to January 26, 2019.


Consolidated Income Statement (Source: Company Reports)

Premier’s consolidated balance sheet was robust, and the company has cash on hand of $183.2 million at end of 1H FY 2019. The company stated that the balance sheet at the end of 1H19 reflects investment in associate (Breville Group Limited) as $238.9 million and the current market value happens to be $602.6 million. However, investment in Myer Holdings Limited amounted to $34.9 million and the current market value stood at $50.4 million. The market values reflected BRG share price of $16.51 and MYR share price of $0.57 (as at 20 March 2019).

There are expectations that 4 new pathways to global Smiggle retail sales growth, beginning in 2H FY 2019, would be delivering higher EBIT margin with materially less capital drive and would be generating increased cash flows. In a nutshell, balance sheet position, Premier Retail’s gross margin strategies as well as deployments towards growth initiatives are the factors which can act as tailwinds for long-term growth.

Top 10 Shareholders: The following table provides a broad overview of the top 10 shareholders of Premier Investments Limited. As can be seen from the table, the first position is being bagged by Century Plaza Investments Pty. Ltd. which is holding 32.60% in terms of interest.


Top 10 Shareholders (Source: Thomson Reuters)

Decent Footing in Key Margins: Premier Investments Limited is having a decent footing with respect to its key margins as its net margin stood at 13% in 1H FY 2019 which is higher than the industry median of 5.3%; and this reflects that the company is having a better capability to convert its top line into bottom line. The company’s EBITDA margin stood at 18.9% which implies a year on year (YoY) rise of 0.8%. The company’s RoE (or return on equity) stood at 6.5% in 1H FY 2019 which implies a YoY rise of 0.7%, reflecting that the company has delivered improved returns to the shareholders which might attract more market players.


Key Metrics (Source: Thomson Reuters)

The company’s current ratio stood at 2.49x in 1H FY 2019 which is higher than the industry median of 1.55x reflecting that the company is having sound liquidity levels which might help the company in meeting its short-term obligations. Also, the sound liquidity levels provide a decent headroom to the company for long-term growth prospects. The company’s Assets/Equity stood at 1.28x in 1H FY 2019, which is lower than the industry median of 2.34x which reflects higher equity component in financing the company’s assets as compared to the broader industry. The company’s ROIC or (Return on invested capital) stood at 5.5% in 1H FY 2019 reflecting a rise of 0.6% on the YoY basis.  

Strategies Supporting Premier Retail’s Gross Margin: Premier Retail’s gross margin stood at 63.0% in 1H FY 2019 which was delivered because of effective implementation of the key gross margin strategies. The key long-term foreign currency hedging policies allowing for long-term merchandise planning, sourcing from the new geographies and deployments towards better merchants and delivering of the better product are some of the key gross margin strategies. However, direct sourcing initiatives and ongoing focus towards disciplined execution of markdown management were also among the gross margin strategies.

Broad Understanding of Premier Retail: Premier Retail posted sales amounting to $680.2 million in 1H FY 2019, which reflects a rise of 8.0% on the YoY basis, and like-for-like (or LFL) sales rose by 4.6% on the 1H FY 2018 on the constant currency basis. The company stated that strong growth continues in EBIT for 1H FY 2019 in Premier Retail. The business witnessed seven consecutive years of first half EBIT growth in critical summer season.


Premier Retail 1H FY 2019 EBIT (Source: Company Reports)

The company stated that there has been continuing sourcing from the new geographies. The key focus area revolves around deployments towards better merchants and the delivery of better product. The CODB (or Cost of Doing Business) witnessed a fall of 68 bps as a percentage of sales to 46.3% in 1H19. The costs have been well controlled amidst structural inflationary pressure. The deployments would continue towards strategic growth initiatives which include Online, Smiggle’s international expansion and Peter Alexander.

Growth in Online Sales: Premier Retail has been making deployments towards new stores, upgrades as well as refurbishments in order to deliver sustainable sales growth. In 1H FY 2019, 89% of the capital investment in Australia and New Zealand stores were financed with the help of landlord contributions.


Online Sales Growth (Source: Company Reports)

As per the company, the deployments continue towards technology, people as well as new marketing initiatives in order to help it deliver a ground-breaking platform. Premier Retail grew online sales for 1H FY 2019 by 35.2% and stood at $75.7 million. The online business made the contribution of 12.9% of the sales in countries and brands with transactional website compared to 10.2% in 1H FY 2018. The online business happens to be highly profitable and its EBIT margin is higher than the group average.

Key Valuation Metrics (Source: Thomson Reuters)

What Could Help PMV Moving Forward: As mentioned above, Premier Investments has been controlling costs even though there was some structural inflationary pressure. There are expectations that deployments would continue towards the growth initiatives which include online, Smiggle International and Peter Alexander. In the span of past 12 months, Premier Retail closed 16 stores and, thus, over the past six years it had closed 101 stores as part of the ongoing program to close unprofitable stores.

It was mentioned that The Apparel Brands’ LFL performance happens to be stronger than total sales result as Premier Retail has and would continue to close the unprofitable stores because of unrealistic landlord rents. The closure of stores appears to be EBIT positive for the group despite headline loss of sales. Additionally, there are expectations that lesser reliance on debt when it comes to financing the assets as compared to the industry median (as evident from Assets/Equity ratio for 1H FY 2019) and strong balance sheet might act as tailwind for the company. It was mentioned that Brexit negatively impacted the entire UK economy as well as sapped the consumer confidence over the Christmas period; and the Board and Management of Premier recognised over calendar 2018 that the historical paths to the global growth were no longer as relevant now because of major structural changes with respect to global consumerism, technology and the risks related to committing to long term leases as major form of global expansion. Premier’s proactive response got announced in the month of September 2018 and four major pathways to accelerate and diversify Smiggle’s growth were highlighted. These pathways are underway and would be setting up Smiggle for the global growth. Smiggle anticipates that its aspirational target of $450 million in annual global retail sales would be delivered in calendar year 2021 or 2022.

Valuation Scenario: In view of the exemplary method of Price/Book Value based valuation, the stock price is expected to witness a decent upside in the next 12-24 months.


Price/Book Value Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Stock Recommendation: The stock of Premier Investments Limited had delivered the return of 3.59% in the span of previous six months while, in the time frame of past three months, the returns stood at 7.59%. As per ASX, the company is having an annual dividend yield of 3.95% and this is considered to be at decent levels for value investors. Because of the strength in Premier’s balance sheet as well as strong performance of Premier Retail, the Board declared an increased interim ordinary dividend amounting to 33 cents per share (fully franked) (which reflects a rise of 13.8% or 4 cps on 1H18). The interim ordinary dividend would be payable on June 14, 2019 given the record date of May 31, 2019.

Moving forward, the company is expected to be helped by Premier Retail’s gross margin strategies, deployments towards growth initiatives and by four pathways to accelerate Smiggle growth. Considering the above-mentioned factors, exemplary valuation based on Price/Book Value, and technical scenario, we expect a stock price upside of single digit (in %) in the next 12 months or so.

Accordingly, we give a “Buy” recommendation on the stock at the current market price of A$16.940 per share.


PMV Daily Chart (Source: Thomson Reuters)

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