16 January 2009
Australian Equities
Retail 2009 outlook
Kristan Walker
Research Analyst
(+61) 2 8258-1645
kristan.walker@db.com
Matthew Iser
Research Analyst
(+61) 2 8258-1791
matthew.iser@db.com
Outlook
We start the year with two ratings downgrades (MTS and WHS) released in
conjunction with this note. Our downgrade to MTS reflects our view that valuation
is stretched weighed up against a trend to watch in 2009 of a shift from
‘convenience’ to ‘best price’ to the detriment of the Independents. Whilst WOW’s
(Hold) valuation also remains challenging we believe the company is better placed
on ‘best price’ in grocery hence our preference to WOW for food retail exposure.
DJS (Buy) and JBH (Buy) remain our top picks.
Deutsche Bank AG/Sydney
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Strategy Update
Top picks
David Jones (DJS.AX),AUD2.71 Buy
JB Hi-Fi Ltd (JBH.AX),AUD9.51 Buy
Companies featured
Billabong (BBG.AX),AUD7.68 Hold
2008A 2009E 2010E
P/E (x) 16.4 8.9 7.5
Div yield (%) 4.0 7.1 8.4
Price/book (x) 2.8 1.8 1.7
David Jones (DJS.AX),AUD2.71 Buy
2008A 2009E 2010E
P/E (x) 15.3 9.3 8.8
Div yield (%) 6.3 10.4 10.9
Price/book (x) 2.7 2.0 1.9
Harvey Norman (HVN.AX),AUD2.35 Hold
2008A 2009E 2010E
P/E (x) 18.5 10.9 10.0
Div yield (%) 2.7 4.7 5.0
Price/book (x) 1.7 1.2 1.2
JB Hi-Fi Ltd (JBH.AX),AUD9.51 Buy
2008A 2009E 2010E
P/E (x) 20.3 13.2 11.4
Div yield (%) 2.1 3.2 3.7
Price/book (x) 6.8 4.8 4.0
Metcash Limited (MTS.AX),AUD4.26 Sell
2008A 2009E 2010E
P/E (x) 17.3 15.0 14.1
Div yield (%) 4.7 5.4 5.8
Price/book (x) 2.6 2.6 2.5
Pacific Brands Ltd (PBG.AX),AUD0.44 Hold
2008A 2009E 2010E
P/E (x) 11.9 2.1 2.4
Div yield (%) 6.2 13.7 12.1
Price/book (x) 0.7 0.2 0.2
Wesfarmers Ltd (WES.AX),AUD16.23 Hold
2008A 2009E 2010E
P/E (x) 20.6 7.8 9.2
Div yield (%) 5.1 6.2 6.2
Price/book (x) 1.5 0.6 0.6
Warehouse Group (WHS.NZ),NZD3.60 Sell
2008A 2009E 2010E
P/E (x) 20.8 14.5 14.4
Div yield (%) 3.8 5.4 5.4
Price/book (x) 3.0 3.3 3.1
Woolworths (WOW.AX),AUD26.32 Hold
2008A 2009E 2010E
P/E (x) 22.6 17.9 15.8
Div yield (%) 3.1 3.9 4.5
Price/book (x) 5.0 4.9 4.3
Global Markets Research Company
Discretionary retailers (aggregate) trading at 10% discount to market or ~10x
In our last sector strategy update (Sep 17, 2008) we noted the aggregate
discretionary retail PE rel was trading at a 10% discount to the All Indust. (ex
banks), or ~13x. This was a recovery from the 20% discount or 10x multiple priced
just before reporting season driven by companies ‘generally’ hitting earnings
guidance and good YTD trading updates. Since that time the consumer and the
market capitulated and whilst the sector is still trading at a 10% discount to the
market, multiples have fallen back to ~10x in aggregate. With >20% eps
downgrades now factored in to consensus estimates, most of which occurred
post September, can we expect the multiple contraction to have now stabilized?
Top picks: DJS (Buy), JBH (Buy), WOW (Hold)
Of the discretionary retailers our top picks are JBH and DJS. JBH (Buy) is our
preferred play in the consumer electronics sector. We believe JBH is well placed
at the discount end with a lower average basket size than HVN which should help
JBH mitigate consumer headwinds along with the momentum behind their stores
<3yrs old coming to maturity. DJS (Buy) continues to attack its cost base with
CODB expense reduction and gross margin expansion opportunities that should
underwrite earnings growth through the cycle. The flexibility of DJS cost base was
apparent at the recent 1Q release which despite mid single digit sales declines
saw an increase in NPAT in the range of +5-10%. Despite near term headwinds
the company’s medium term future growth looks sound with a store rollout plan
(4-8 new stores over next three yrs) and high value store refurbishments with
funding locked in.
Valuation – market implied cost of capital = 13.9%...well above LR average
To develop a more comprehensive view on sector valuation we have calculated
the market implied cost of capital. In summary, we calculate the implied cost of
capital for our retail universe (ex WES) as 11.2%, or 13.9% for the discretionary
names only. Notably, the required return for the sector is at the highest looking
across 5yrs and represents a material departure from the medium term average
implied cost of capital of ~8%. Accordingly the higher cost of capital results from
the higher volatility of retail returns against the market as the sector has been
aggressively sold off given the market’s apprehension to own cyclical retail stocks
during an economic downturn (ie a higher beta), and also a higher level of
systemic risk (ie a higher market risk premium) relating to the need to preserve
capital.