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, Asia and Europe. 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
 
Strong Growth in Premier Retail and Record Fully Franked Dividends: Premier Investments Limited (ASX: PMV) operates several specialty retail fashion chains in Australia, New Zealand, Asia and Europe and also has significant investments in listed securities and money market deposits. As on 2 March 2020, the market capitalisation of the company stood at ~$2.67 billion. In the Annual General Meeting, the management stated that the company witnessed another outstanding year with a strong performance in the top-line and bottom-line. During FY19, the Premier Retail management team continued to pursue the successful rejuvenation of its apparel brands along with growth in its online business. This resulted in total global sales to go up by 7.5% to $1.27 billion and an increase of 11.5% in underlying earnings before interest and tax to $167.3 million. In the same time span, the company delivered group NPAT (net profit after tax) of $106.8 million, up by almost 28%. PMV also reported a strong and stable balance sheet, primarily due to significant asset holding of the investment segment and with a cash balance of $190.3 million at the end of FY19. On the other hand, the performance of PMV’s retail online business has exceeded expectations, and the company continued to make significant investments in technology, people and new marketing initiatives to deliver a world class platform and customer experience. The company’s growth strategy is progressing ahead of expectations, and it continues to see strong growth prospects for itself. The company has a track record of sustained performance through all economic cycles and is focused on maintaining flexibility, responding to change and growing a sustainable, long-term business which will deliver strong shareholder returns. The company’s strong results are reflective of its confidence in its growth strategies. Owing to the decent financial and operating performance, the Board declared a record full year ordinary fully franked dividend of 70 cents per share, up by 12.9% on FY18. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR (compound annual growth rate) of 7.41% in revenue and a CAGR of 6.83% in gross profit.

During the year, the company decreased its costs of doing business by 109 bps as a percentage of sales to 48.8% and closed 35 stores as a part of the ongoing program to close unprofitable stores. The company’s effective implementation of key gross margin strategies in a highly competitive market delivered a gross margin of 61.9% for the year. The company’s continued emphasis on markdown management is expected to support margins going forward.

The company is focusing on growth in Smiggle, one of the brands of Premier Retails, using its four major pathways, namely global wholesale arrangements, online growth, concession partnerships with iconic global retailers and new store growth where the economics and shareholder returns are attractive. It is also strategising to progress ahead of expectations and is aiming for a better product and disciplined execution of markdown management in a highly competitive market, leaving a clean inventory position. 


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Premier Investments Limited. Century Plaza Investments Pty. Ltd is the largest shareholder in the company, with a percentage holding of 32.54%. 


Top 10 Shareholders (Source: Thomson Reuters)

Cost Management and Increase in Profitability: During FY19, gross margin of the company stood at 62%, higher than the industry median of 19.7%. This indicates that the company is managing its costs well and is able to convert its revenue into profits. In the same time span, EBITDA margin of the company was 15.2% as compared to the industry median of 6.5%, implying increased profitability of the company. During FY19, net margin of the company was 8.4%, higher than the industry median of 3.4%. In the same period, Return on Equity witnessed a slight improvement over the previous year and went up to 7.9% in FY19 from 6.2% in FY18. This indicates that the company is well deploying the capital of its shareholders and is capable of generating profits internally. During the year, current ratio of the company was 2.80x as compared to the industry median of 1.15x. This implies that the company is liquid enough to pay off its current liabilities using its current assets. In the same time span, Asset/Equity ratio of the company stood at 1.31x, lower than the industry median of 3.08x and Debt/Equity ratio of the company was 0.12x as compared to the industry median of 0.27x. This indicates that the business is financed with a more significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Thomson Reuters)

Record Results Across Brands and Accelerated Growth Strategy of Smiggle: Premier Retail business of the company includes apparel brands such as Just Jeans, Jay Jays, Dotti, Jacqui E and Portmans and unique growth brands - Smiggle and Peter Alexander. During the year, Premier Retail’s apparel brands achieved like for like sales growth of 7.8% across Australia and New Zealand and delivered eight consecutive years of underlying EBIT growth, up by 47 bps on FY18. The company continued to control costs despite the inflationary pressures and placed its focus on individual store profitability to drive shareholder returns. During 2019, PMV’s Retail online business delivered record sales of $148.2 million, up by 31.7% on pcp and surpassed its aspirational target of $100 million in global annual online sales in FY18. 

The company’s strategy to accelerate global growth resulted in record sales of $306.5 million in Smiggle, recording another outstanding year in Asia. Smiggle has received $17 million of wholesale orders and possesses the ability to deliver $35 to $45 million in retail sales to consumers in 1H20. The brand, Smiggle, is represented in over 180 doors through 6 iconic retailers and has a long runway for future global growth. On the other hand, PMV reported record sales of $247.8 million for Peter Alexander, up by 13.3% with strong total and LFL (like-for-like) sales in both Australia and New Zealand. The company has opened nine new stores and witnessed continued expansion delivering exceptional growth of over 500% in children’s sleepwear since FY13.


Premier Retail’s Underlying EBIT (Source: Company Reports)

Growth Opportunities and Future Expectations: Smiggle is maintaining a unique market position and has reaffirmed its growth strategy, targeting to deliver $450 million in annual Smiggle global retail sales, latest by CY22. The online business of the company has continued to deliver exceptional growth well ahead of the market and has delivered a substantial increase in annual sales. The company had the target of $250 million in annual sales by FY20, which was already achieved one year ahead of schedule. The company also expects retail sales of $35 – $45 million through Smiggle wholesale orders received in 1H20, representing a growth of 20% to 25% on 1H19 actual total global retail sales of Smiggle.

Peter Alexander has the potential to open additional 20-30 stores over the next two years with five new stores already confirmed to open in 1H20. Peter Alexander has further growth plans in place via the expansion of ranges online, expanded stores, refurbished stores and new stores. The company expects significant growth opportunities by expanding children’s sleepwear options online and will continue to invest in technology, people and new marketing initiatives to deliver a world class platform and customer experience. PMV’s growth in sales combined with tight controls over the total cost of doing business resulted in the outstanding underlying EBIT in the retail segment. The Group is creating a clear market position to deliver operational outperformance and record financial results and will continue to invest in global presence. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings Market Multiple Approach

Price to Earnings Market Multiple Based Approach (Source: Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months.

Stock Recommendation: As per ASX, the stock of PMV gave a return of 13.84% in the past six months and is inclined towards its 52-weeks’ low level of $14.310. This is a decent opportunity for investors for accumulation. During FY19, the company reported a strong performance and is further aiming to deliver much higher EBIT margin with materially less capital and far greater cashflows. In addition to successful transactional websites in key markets, the company has also expanded its global footprint and is focusing on investing in better merchants. Considering the returns, trading levels, record financial results and significant growth opportunities, we have valued the stock using a 5-year average PE market multiple of 21.68x to FY20 consensus EPS of $0.90 and arrived at a target price of lower double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $16.71, down by 0.89% on 2 March 2020.

 
PMV Daily Technical Chart (Source: Thomson Reuters)

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