Myer Holdings Limited (ASX:MYR)

March 28, 2017 | Price: $1.20

Growth Portfolio

Overview: Myer Holdings Limited (“Myer”, “the Company”) is an Australian department store company focused on retail products. Myer’s stores offer a diverse range of consumer products including fashion and apparel, homeware, electrical goods, and general merchandise. The Company owns and operates 67 stores across Australia as well as its online digital and mobile platforms.

Catalysts: Steady sales and a reduction in capital expenditure are expected to have a positive impact on earnings margins. Recent management changes and a strategic shift geared towards operational improvements provide a platform to turn around one of Australia’s most iconic companies. Myer has made good progress in significantly reducing its debt and a return to sustainable EBITDA growth is a major value driver and could reinvigorate market confidence. We note an increase in corporate activity.

Hurdles: Earnings per share (‘EPS’) have declined over the past six consecutive years and there is no guarantee that the trend won’t continue. Myer’s operations are capital intensive and the Company competes against online stores with significantly lower fixed costs and higher operational leverage. Myer has failed to respond to industry trends over the past few years, which has impacted financial performance and sentiment towards the brand.

Investment View: Myer offers profitable exposure to Australian consumer trends. We are attracted to the Company’s improving balance sheet, a renewed focus on cost control, and recent management changes. However, Myer operates in a mature market characterised by high competition and capital-intensive operations, which has impacted margins. While sales have been steady, a return to sustainable EBITDA growth is the primary driver for the stock and as the balance sheet improves, Myer may witness an increase in corporate activity. MYR is trading near an all-time low and with over 15% of its stock subject to short-selling, we favour the balance of risk and initiate coverage with a ‘buy’ recommendation.

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