Myer Holdings Limited

Company Overview: Myer Holdings Limited (ASX: MYR) operates several department stores across Australia. The merchandise offering includes core product categories namely, apparel for women, men and children; beauty; homewares; electrical goods; toys and general merchandise. In addition to its stores in Australia, the company operates in China and Hong Kong. The company has also gained momentum in its online business, delivering strong growth. The company undertakes its activities through its subsidiaries, namely sass & bide and Marcs and David Lawrence.

Disciplined Management of Costs and Preservation of Cash: Myer Holdings Limited (ASX: MYR) operates several department stores across Australia. The merchandise offering includes core product categories namely, apparel for women, men, and children; beauty; homewares; electrical goods; toys and general merchandise. As on 15 September 2020, the market capitalization of the company stood at ~$176.57 million. The company has recently released its results for FY20, wherein it reported total sales of $2,519.4 million, reflecting a decline of 15.8% on the prior corresponding period (pcp). This was mainly due to extensive closures of stores due to the COVID-19 pandemic and a decline in comparable store sales. However, online sales of the company witnessed a substantial increase of 61.1% to $422.5 million, representing 17% of total sales. Despite the deterioration in trading conditions, the company managed to reduce its operating expenses and reported a decrease of 13.8% in the cost of doing business to $863.8 million. This was due to the net cost reduction in 1H20 and the actions taken in response to COVID-19. During FY20, EBITDA of the company stood at $93.5 million, while the company incurred a statutory net loss after tax of $172.4 million. During 2H17 - 1H20, the company witnessed a CAGR of 3.05% in total revenue, reflecting prudent operational growth and the decent platform creation for future growth.

During uncertain times, the rapid growth in online sales accelerated. MYR has entered a multi-year agreement with Australia Post, which will enhance its ability to offer an efficient and fast online experience for customers. The agreement will offer warehousing and online fulfilment services.

During the shut-down period, the company minimized its cash burn and positioned the business well for recovery. The company reported a net cash position of $7.9 million, reflecting an improvement of $46.6 million over FY19. This was mainly due to a prudent approach to preserve cash, disciplined cost control, support from the Australian Government and other payment deferrals.

Accelerated Increase in Online Sales (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Myer Holdings Limited. Premier Investments Ltd is the largest shareholder in the company, with the percentage holding of 10.77%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During 1H20, gross margin of the company stood at 46.4%, while a net margin  turned around from  -1.3% to 1.8%. This indicates that the company is well managing its cost of operations . In the same time span, EBITDA margin of the company witnessed an increase over the previous half and stood at 7.8%, indicating higher profitability. Consequently, during 1H20, the Return on Equity of the company stood at 5%, up from -2.3% returns in 1H19. This reflects the shareholder’s capital is well managed During 1H20, Assets-Equity Ratio of the company was 7.51x, and Debt-Equity Ratio stood at 5.09x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Gained Market Share in the Online Sales: With the onset of COVID-19, the subsequent closures, and the social distancing measures, several industries witnessed a boom in online sales. During FY20, MYR online sales channel grew faster, and registered a growth of 98.8% Y-o-Y in 2H20, with strong growth in beauty and homewares. Despite the unavailability of click and collect locations, and some cost headwinds, online services are growing profitably. The company is planning for another step change with the introduction of Factory to Customer ‘F2C’ set up. MYR is building momentum in gaining its online share, which is likely to uplift the experience of the customers with simpler online check out and smarter online search functionality. MYR is also enhancing its online fulfillment and is utilizing its store network and partnerships with Amazon to broaden its reach and deliver convenience to its customers. 

Progress in Online Sales (Source: Company Reports)

Successful Completion of the Revised Finance Facility: The company has recently announced that it has entered an agreement with its current lenders to extend its bank facility until August 2022. Given the uncertainty surrounding the COVID-19 crisis and its impact on operations, the lenders have agreed that there is no requirement of covenant testing. The new facility of $340 million (expected to be amortized by $30 million in 2021 and $60 million in 2022), compares to the current facility of $360 million.

Key Investment Risks: The company is exposed to a variety of risks which may affect its future growth prospects. These include the risks related to the COVID-19 pandemic and its impact on domestic and global economic conditions. Other  macro-economic factors, for instance, fluctuations in the Australian dollar and interest rates, as well as poor consumer confidence may impact the business environment. Also, MYR operates in a highly competitive retail industry. The company is also susceptible to the risks related to its brand reputation, failure to comply with applicable laws and regulations, and failure to deliver on its strategic plan.

Future Expectations and Growth Opportunities: The company seems well-positioned for recovery and has sustained well during the COVID-19 crisis. It has further strengthened its balance sheet with the deleveraging and the decent increase in the liquidity position. It is focusing on driving down its costs and is investing in the simplified business process. With the ongoing headwinds of COVID-19 crisis, the company has adjusted its Customer First Plan initiatives by expanding into new areas and through acceleration its online business. The company is also improving its product range for customers with a more disciplined approach through focus on core product lines and supplier relationships.  MYR is rationalizing its SSO costs, operations and management costs and is setting clear principles for expansion and development to stay lean.

The geographical presence of the company and its regional locations is providing MYR with some insulation despite the challenging market environment. It is anticipating that its online business is likely to be a billion-dollar business in the coming years. The company has announced that it will hold its Annual General Meeting on 29 October 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has adapted to  the current operating environment and seems well-positioned to capitalize on future growth prospects. MYR is simplifying its business processes with improved range of products and extended marketing efforts. As per ASX, the stock price of MYR gave a return of 4.88% over the past one month. The stock is also trading close to its 52-weeks’ low level of $0.083, proffering a decent opportunity for accumulation. On a technical analysis front, the stock price of MYR has a support level of ~$0.182 and a resistance level of ~$0.322. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target price, offering an upside of lower double-digit (in percentage terms). Considering, the current attractive trading levels, decent historical returns, modest long-term outlook and the online channel sales growth prospects, we recommend a ‘Buy’ rating on the stock at the current market price of $0.215 on 15 September 2020.

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