Morgan Stanley has its annual note out on potential surprises in the Australian consumer sector, and first out of the blocks is a takeover scenario for Myer.
It says while the likelihood of a takeover for the iconic Australian department store chain is low, that “on any metric valuation” the stock is cheap, and that the trend in globalisation in retail means a Myer takeover would improve execution.
Analysts Thomas Kierath and Monique Rooney present this table, showing Myer, which has strong cash flows, trading at a vastly lower P/E ratio to comparable stocks:
Until around 18 months ago Myer’s biggest problem, in terms of how people talked about it, was its seeming inability to do anything right in the digital space when confronted with a very rapid growth in digital retail sales. That has abated; the once-explosive growth of online retail sales in Australia has been slowing, and it’s generally now agreed that bricks and mortar stores have a bright future. (Myer, too, has built a semblance of a digital offering.)
But how they are run, who owns them, and whether consumers will continue to flock to department stores is anyone’s guess.
(As of the latest ASIC data, Myer was the most-shorted stock on the ASX in percentage terms – with almost 18% of the stock in short positions. Retailers like Myer and JB Hi-Fi regularly feature at the top of this list.)
The takeover of Myer’s key competitor David Jones by Woolworths of South Africa means Myer, run by Bernie Brookes, is the last domestically-run traditional department store chain with a fashion core. Kierath and Rooney add:
We would argue that if MYR is acquired by an international department store chain, execution would improve given the greater depth of experience and knowledge in the business. Apparel retailing is globalising as specialty retailers (H&M, Zara, Gap, Uniqlo, Topshop) expand their reach which now includes Australia. We think it only a matter of time before the department stores undertake similar strategies and follow the lead of Woolworths SA, which acquired David Jones during 2014.
Food for thought. The analysts add the current availability of cheap credit would mean funding a deal would be low – they say a rate of 4% would mean annual costs of $57 million; and with the property market the way it is, and long-term leases likely to be an obstacle, a global chain trying to establish a national footprint in Australia might see a takeover as a cleaner solution than a ground war.
Then there’s Australia’s role in a global retail growth strategy, which has changed:
In our view, Australia has, until recent years, been viewed by international retailers as a isolated retail market not worth bothering with – it is now viewed as a retail market with lower competition, fast growing population base, wealthy and politically stable, thus attractive. We believe that an international department store may view acquiring Myer and gaining exposure to the southern hemisphere as a defense strategy in reaction to greater local competition.
In what is not a favourable comment on the current management, Kierath and Rooney conclude: “Generally, we believe that the investment community views Myer as a structurally challenged retailer that has struggled to execute in recent years. We think that the probability associated with a bid is low, which is also evidenced in its current share price, which is barely up from its historical lows.”
Oh, their other potential consumer sector surprises (not predictions, but market-moving scenarios): declining margins in the supermarkets; Super Retail stock going on a tear; Treasury Wine making acquisitions in Australia rather than the US, and international travel growth turning negative.