We recommended Premier Investments (ASX:PMV) in The Dynamic Investor in mid-May this year. Our primary reason for doing so was that the shares were undervalued in light of the potential upside from Smiggle/Peter Alexander demerger plans. The shares rallied since and we recently revisited our mid-May report to assess whether there is further upside in light of the recent Myer proposal.

About Premier Investments

Premier Investments owns global retail brands Smiggle and Peter Alexander as well as a portfolio of apparel brands in Australia & NZ. Smiggle and Peter Alexander are the highest-margin and highest-growth brands and currently account for ~50% of group sales, which has increased from ~45% pre-COVID.

• Smiggle is a retailer selling bags & accessories, pencil cases, food & drink, stationery, toys and school supplies. Smiggle has a network of 305 stores (including concessions) in major developed countries/regions, including Australia & NZ, UK & Ireland and Asia (Singapore, Hong Kong & Malaysia). A key aspect of the Company’s strategy with regards to the Smiggle brand is to expand into Europe and increase both the portion of online sales and store network.

• Peter Alexander is a retailer selling sleepwear (men, women & children), homeware and beauty products.

• The Company also operates five core apparel brands in Australia & NZ. In order of sales contribution from the most recent results, these comprise Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E.

Key Fundamental Drivers

Myer Proposal Remains Under Consideration

On 24 June 2024, PMV announced that the Company received a proposal from Myer to explore a potential combination of Myer and PMV’s Apparel Brands business. The proposal is currently under consideration by the PMV Board, with no certainty that the proposal will result in a binding offer or transaction.

The rationale for the proposed transaction is to expand respective addressable markets through differing customer bases, store networks and regional mix. It would also provide scope for Myer to potentially leverage the PMV Apparel network as an online distribution point for its apparel range.

The main avenue for potential synergies is in improved sourcing, which would result in higher gross profit margin (GPM) for Myer. Further, the store network can be enhanced and PMV can also reduce its rental costs given that the Company already has a strong position with landlords.

There is also an opportunity to remove duplication costs via utilising the Myer’s large-scale national distribution centre in Victoria.

Demerger Plans on Track – But Concerns Emerging

The PMV Board has previously agreed to work towards demerging Smiggle into a separate listed entity by the end of January 2025. As well, PMV is exploring a demerger of Peter Alexander into a separate listed entity in calendar year 2025.

There has been no change to either the timetable/Company plans. Importantly, the potential upside to PMV valuation from a demerger remains. This is because the investment market ascribes higher multiples for growth assets. Having said that, there are market concerns regarding the expansion of Peter Alexander into the UK, as well as the growth profile for Peter Alexander in Australia & NZ. In particular:

• The UK apparel market is highly competitive, and the Peter Alexander brand has little traction outside of the core Australia & NZ markets.
• Given the recent strong sales performance for Peter Alexander in Australia & NZ (+16% over FY19-24 on a CAGR basis), the growth profile is likely to slow. Having said that, Peter Alexander has a strong record of beating consensus expectations.

The Company has stated at the time of the announcement of the Myer proposal that it continues to work towards the respective mergers, However, the timing of the demerger plans may be impacted in the event that Myer was to acquire the PMV’s apparel business.

Earnings Growth Profile Has Moderated

We estimate that the EPS growth profile over FY24-26 has moderated over a short timeframe, to ~4% on a CAGR basis from ~6%. This reflects market concerns about the growth path for Peter Alexander, as well as ongoing market concerns about relating to increased cost of living pressures. These factors are starting to outweigh the potential upside in EPS growth from continued strong margin management, further store expansion and a strong balance sheet that provides capital management optionality.

Fundamental View

The valuation upside from a potential demerger of Smiggle and Peter Alexander, as well as from the Myer proposal has started to be reflected in the share price. To this end, the majority of market valuations are currently >$32 per share, which are ~1% below the current share price. In addition, the recovery in PMV shares has pushed the 1-year forward P/E multiple up to 18x. This multiple is towards the mid-point of the range over the last two years.

Charting View

Since late March, PMV has been trading in a range, where we have seen some clear price rejection at levels above $33. With the stock once again up at those levels, we would be cautious to be entering here from a charting perspective. A dip back towards the lower end of the trading range near $29 would be a better entry point. For now, PMV is one to keep on the watchlist.

 

Michael Gable is managing director of Fairmont Equities.

 

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