Time to buy Premier Investments?

We recently researched Premier Investments (ASX:PMV) in The Dynamic Investor. In early March, PMV announced further details on demerger plans for 2025 involving its two highest growth assets – Smiggle and Peter Alexander. In the near term, the most pressing investment risk is increasing evidence of continued challenges in consumer discretionary spending. On balance, does PMV represent value at current levels?

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. 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

De-Merger Plans Outlined – Potential Valuation Upside

In August 2023, PMV announced a strategic review to better understand the opportunities to accelerate growth and returns for shareholders for each of Premier Retail’s three key businesses: Smiggle, Peter Alexander and Core Apparel Brands. Smiggle was long touted as a possible spin-off, but that option was placed on hold in light of Brexit and COVID-19.

At the interim results release in March 2024 the Board has agreed to work towards demerging Smiggle into a separate listed entity by the end of January 2025 and to explore a demerger of Peter Alexander into a separate listed entity in calendar year 2025.

The decision to demerge is likely to act as a positive catalyst for the shares in the short term. This is mainly because a demerger offers significant upside valuation potential. The investment market typically ascribes higher multiples for growth assets.

Are there Risks Associated with a Demerger?

There are likely to be challenges from separating the businesses given that IT infrastructure and distribution costs are shared. Having said that, PMV has stated it has no major plans to overhaul systems with respect to an ERP and any cost of system upgrades would not be significant. Secondly, favourable rental negotiations may be harder to achieve as three separate entities.

In addition, timelines and language were not definitive (i.e. ‘exploring’ a demerger of Peter Alexander). Furthermore, a demerger would be a costly exercise and it can be argued that incremental value could be realised from demerging the core apparel business.

Finally, there are still no details on capital requirements, business plans, management structures, separation costs and any cost dis-synergies.

Are Recent Sales Trend a Concern?

Lower discretionary spending has become recently more evident. For PMV, this is expected to have an impact on 2H24 trading for Smiggle, Peter Alexander and the core apparel brands in the domestic market. However, it is worth noting management commentary that there has been improved momentum from 1H24 back in line with the prior period. In addition, recently-announced Stage 3 income tax cuts are likely to improve the level of discretionary spending from June 2024 onwards.

Margins Remain Well Managed

Despite a challenging competitive environment, PMV reported flat gross profit margin of 63.5%. This reflects less discounting and maintaining inventory productivity by not buying too much stock.
PMV has a track record of managing costs well and 1H24 was no exception. Both employee and rental costs down year on year, despite inflation across both in the market. In addition, rental costs continue to be well managed. While landlords are looking to pass through higher interest costs, the Company enjoys the benefit of a strong position with landlords.

Balance Sheet Provides Capital Management Optionality

The proposed demerger has the potential to unlock significant funds (~$1.5b-2.0b) which can be used for capital management. Potential capital management is a key investment appeal for PMV. This is because the balance sheet has sufficient surplus capital available for the Company to pursue these.

The more immediate capital management options include a share buyback and further special dividends. This is due to PMV having an attractive pool of franking credits which has been steadily increasing in recent periods.

Fundamental View

PMV shares are currently trading on a 1-year forward P/E multiple of ~17x, which is towards the middle of the range over the last two years (~14-19x). Notwithstanding, the current multiple is not overly demanding in the context of an EPS growth profile of ~6% over FY24-26 on a CAGR basis. Further, the medium-term EPS growth profile is becoming more appealing on the back of continued strong margin management, further store expansion and further capital management initiatives.

We consider that there is potential for a further re-rating as the share price is likely to further factor in the valuation upside from demerger plans. To this end, there is significant valuation upside from current levels given that the majority of market valuations are currently >$33 per share.

Charting View

After gapping up to a new high in March, PMV encountered some selling pressure and it has been sliding since then. This means that we are likely to see some lower levels in the short-term before it is ready to head higher again. With strong support near $28, we would be looking to buy PMV closer to those levels over the next few weeks.

Premier Investments (ASX:PMV) daily chart
Premier Investments (ASX:PMV) daily chart


Michael Gable is managing director of Fairmont Equities.


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