A look at the retail sector as Goliath enters the fray!
Yesterday afternoon’s optimism flowed into early trade this morning with the market opening strongly, buying continued in the banks while resources copped a strong bid following strength overnight in commodity markets, however the market wavered from around 11.30 onwards and trended lower into the close – finishing more than 40pts from the session highs. We had a range today of +/- 49 points, a high of 5922, a low of 5873 and a close of 5878, up +3pts or +0.05%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
A couple of interesting aspects to think about this afternoon, with particular interest in the retail sector following a big drop by Vita Group (VTG), down 30% early on and a bearish note on the retail sector put out by Citi this morning that targeted JB Hi Fi and Harvey Norman. Here’s an extract from Citi ‘s analysts Bryan Raymond who cut earnings and valuations on JBH & HVN 30-40% after looking at the the Amazon effect, which he now factors into his long term base case.
They have downgraded JBH to Sell, while reiterating the existing SELL on Harvey’s. Bryan’s work looks at US, UK and German retailer performance around Amazon Prime launches and surveys of price differentials in key categories, which shows Amazon is 15% cheaper than Aus retailers across major categories. Citi reckons that ASPs need to contract by ~10% to narrow this gap to ~5%. This will drive ~180bps – 250bps declines in long term EBIT margins. Retailers typically see margins begin to recover 5yrs+ after Amazon launches Prime. We expect the electronics industry to likely consolidate further, as retailers rationalise store footprints. We expect JBH to become more efficient, likely closing one of their 2 Melb head offices and upgrade their synergy targets to $50m (currently $15-20m). The market is likely to look through upside risk to FY17e earnings as a further PER de-rating is likely as peak cycle earnings occurs.
Here’s what the rest of the Broker world thinks of JB at the moment… Current consensus price target of $29.42 representing upside of 22.4% - which suggests that most remain keen on it and there’s probably room for disappointment. Often a stock will bottom when the analyst community hate it – they rarely bottom when the mkt is still long and wrong!!! Which seems to be the case with JB and HVN at the moment. As we covered in the AM report earlier in the week, we have no interest in the sector at this stage (we also discuss this view in the Video done today)
JB Hi Fi (JBH) Daily Chart
Vita Group (VTG) is a stock MM has traded last year, and it was actually one of bigger short term wins…however today the coy announced more detail around it’s Telstra (TLS) licensing deal (it runs more than 100 Telstra branded retail outlets) and it wasn’t good. These guys are no doubt very good retailers and have done an exceptional job over time however they’ve always been at the mercy of a bigger brand and when that bigger brand is hit with increasing competitive pressures as is the case with TLS right now, that pressure gets transitioned down the chain and VTG has felt the brunt of it today. The other interesting aspect here is that Director and biggest shareholder Maxine Horne sold 10m shares at the end of last year at $4.95 – they now trade at $1.55…
Horne is still the major shareholder however some of the better known aussie investors in Wilson Asset Management and Roger Montgomery’s fund are big holders…We have no interest in VTG at current levels.
Vitagroup (VTG) Daily Chart
Have a great night,
The Market Matters Team
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