Super Retail ((SUL)) is poised to take advantage of the disparity emerging as domestic travel restrictions are lifted and international travel remains on hold.
Moreover, market concerns regarding the company’s balance sheet should be put to rest now with the company undertaking a $203m capital raising. This will bolster the balance sheet and enable Super Retail to invest in its omni-channel capability, Morgans asserts.
The broker upgrades net profit forecasts by 3-8% over the next couple of years, offset by the dilution from the entitlement offer, which means earnings per share forecasts fall by -6-10%. Morgans suggests that any business that can withstand the pandemic and trade through the upheaval will attract a higher multiple going forward, and upgrades to Add from Hold.
Ord Minnett agrees the business is well situated for a recovery and Credit Suisse is also bullish about 2021, with all three brokers expecting a substantial boost to domestic leisure expenditure that will support the company’s leading brands.
With travel restrictions being lifted domestically, there is more confidence about the likelihood of an increase in domestic leisure expenditure. Around $40bn of international travel expenditure is assessed by Credit Suisse to be likely reallocated to savings and domestic holidays and this should drive an increase in goods related to recreational activity.
Moreover, Super Retail also has a strong online platform that can capitalise on changed consumer purchasing trends. A number of temporary measures have mitigated cost throughout the pandemic lows and gross margin did not deteriorate as much as Credit Suisse feared.
Going forward, UBS highlights fragmented markets, particularly leisure, with scope for consolidation and more rational pricing. Still, catalysts are limited for the stock and there remains significant uncertainty around trading after September.
UBS continues to forecast a large drop in FY21 earnings (EBIT), reflecting macro uncertainty. A quick recovery, however, is anticipated and FY22 earnings estimates are 4% ahead of pre-pandemic levels.
Morgan Stanley, assuming May sales momentum is maintained and profitability is in line with the average year to date, expects FY20 operating earnings (EBITDA) of $300m, and this is 11% above its prior estimates.
Capital Raising
UBS accepts the rationale of the capital raising to return expenditure to historical levels even if a softer trading environment emerges. Super Retail has announced an underwritten 1-for-7 accelerated entitlement offer at $7.19 a share with proceeds being used to strengthen the balance sheet and fund an increase in capital expenditure.
Citi considers the capital raising is an opportunity to prepare the balance sheet for the environment going forward, as liquidity was already adequate and trading was solid. The broker expects the dividend will remain suspended in the second half.
Sales trends are mixed, Citi assesses, reflecting store locations and product. The broker expects the earnings margin will contract by -70 basis points to 7.2% in the second half and then stabilise in FY21.
Brand Mix
Credit Suisse expects a strong boost to sales of BCF (Boating, Camping, Fishing) and Macpac with a more modest boost to sales in the sports and automotive segments. Rebel sales were soft over recent months as foot traffic declined in CBD and shopping centre locations.
Meanwhile, Macpac’s weak result could be largely explained by store closures in New Zealand and BCF sales trends have improved as travel restrictions are lifted. Bell Potter agrees BCF will stand to benefit from a lifting of domestic travel restrictions during the period international restrictions remain in place.
The automotive business benefited from a shift towards essential “self-sufficiency” products, Citi points out. Like-for-like sales growth was 3.7% in April/May at Supercheap Auto.
While Rebel slowed, Bell Potter suggests the -2.3% drop in April/May was a solid outcome given the difficult conditions. Ord Minnett also notes Rebel is in a robust industry (health and well-being) as well as positioned favourably in terms of market share.
The broker was disappointed with both BCF and Macpac and considers the risk is elevated, given the patchy track record of these businesses. Yet a skew to domestic travel should be supportive.
Bell Potter not one of the seven stockbrokers monitored daily on the FNArena database, retains a Hold rating based on valuation and the difficult outlook, with a target of $8. The database has six Buy ratings and one Hold (UBS). The consensus target is $9.26, signalling 13.1% upside to the last share price. Targets range from $8.20 (UBS) to $9.92 (Credit Suisse).
