Morningstar

Morningstar, Inc.

Equity Bottom-Up

No moat-rated Myer surprised the market with a solid first-half result for fiscal 2019, loaded with a raft of clear operational and financial improvements. The market reacted accordingly, with the share price jumping 11%. Nevertheless, shares are still trading at a meaningful discount to our fair value estimate and screen as undervalued. We increase our fair value estimate by 5% to AUD 0.66 due to the time value of money.

We maintain our AUD 0.63 fair value estimate on no-moat rated Myer, after management provided a quarterly trading update contrary to its original intentions not to. Allegations in the financial press, aimed at Myer’s financial performance, triggered the response from management. Our investment thesis stands: Myer’s sales remain flat long term, as the chain continues to lose market share to online players and specialty fashion stores. The department store sector, including Myer, gradually reduces…

We visited no-moat Myer’s Southland, Victoria, department store and met with CEO John King and other senior management. Following the site tour and our discussions, we retain our AUD 0.63 fair value and earnings estimates. At current prices, shares trade at a discount of around 17% to our intrinsic assessment. The focal points of the company’s longer-term strategy were reiterated and are akin to those of other retailers domestically and abroad. This includes a high-quality product range that is…

No-moat Myer’s costs of doing business surprised, materially increasing despite decreasing sales, causing underlying net profit after tax of AUD 32.5 million to miss our estimate of AUD 40.2 million. The refinancing of the company’s debt and associated debt covenants has been addressed, diminishing the likelihood of a dilutive equity raising for now. We were disappointed in the absence of tangible medium targets from John King, Myer’s new CEO. However, the strategic direction matches that of…

No-moat Myer’s sales continued to slide in the third quarter of fiscal 2018, but less than we had expected. The surge in online sales persisted but failed to plug the gap left by the challenged physical store network. The Australian working visa for incoming CEO John King has been approved, removing uncertainty around his start date. We reiterate our fair value estimate of AUD 0.66, and despite today’s 16% rise, the shares remain undervalued.
Analysts: Johannes Faul, CFA and Angus Hewitt

Australia

Myer Holdings Ltd. operates department stores. The Company retails womens wear, mens wear, youth fashion, childrens wear, intimate apparel, beauty, fragrance, cosmetics, house wares, electrical goods, toys, fashion accessories, and general merchandise.

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