3 ASX shares to avoid
These shares have surged in price in the last year but are significantly overvalued according to our analysts.
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The following 3 ASX share have been on a strong run. It can be tempting to assume those strong returns will continue into the future but our analysts believe all of them are significantly overvalued.
JB Hi-Fi (ASX: JBH)
JB Hi-Fi is one of Australia's largest retailers, having built a strong brand and market leadership within the consumer electronics industry, after the demise of smaller players, and more recently of major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.
The shares are up over 52% in the last year. Our fair value estimate of $37.50 is based on the expectation that JB Hi-Fi successfully adapts to the ongoing trend of consumers switching to e-commerce. The shares are trading at more than a 70% premium to our fair value.
Shares are trading at over 15 earnings which is higher than the 5 year average of 11.82. We expect revenue growth to slow during the next year as consumer demand for nonessential items remains soft. We expect net profit margins to return to long-term maintainable levels of around 4%, because we anticipate competition to revert cyclically high gross margins to maintainable levels. Over the next five years, we expect sales to grow at a compounded annual growth rate of 2%.
The impact of competition is exacerbated by the lack of moat or sustainable competitive advantage. The brand has resonated well among consumers as a differentiated youthful brand offering value and convenience. However, competitors have realigned their strategy to offer similar levels of discounts and store appeal. The demise of Dick Smith has removed a competitor, but we expect competition in electronics retailing to remain significant, especially from online pure plays like Amazon, Kogan, and Catch.
Online retailers operate in an environment of very low fixed operating costs, with technology providing a 24-hour shopfront and no need for expensive leases or sales staff. The lower operating cost enables digital retailers to deliver products at a compelling price and offset JB Hi-Fi's scale advantage. JB Hi-Fi’s offering is also not differentiated enough to justify selling products at a premium retail price.
We expect an increasing proportion of consumers will shift to online shopping and see this as a structural headwind for omnichannel retailers including JB Hi-Fi. Branded technology has become commoditized, and we see consumer electronics as one of the most exposed categories to channel shift. With online penetration of 35% in 2022, according to Euromonitor, we think e-commerce has significant headroom to take share in Australian consumer electronics based on higher penetration in comparable markets, such as the U.S. around 72%, as per Euromonitor, the U.K. at 69%, and Germany at 42%.
The dividend yield is attractive at over 4% although we expect the dividends per share to drop meaningfully from $3.12 to $2.19 by 2025.
Premier Investments (ASX: PMV)
Premier Investments is an Australian company that operates six speciality retail fashion chains in the speciality retail fashion markets in Australia and New Zealand. It also operates the unique Smiggle brand, retailing children’s stationery in Australia and overseas markets. Premier Investments also owns the prolific Peter Alexander brand, which it intends to expand internationally.
The shares have gained 64% in the last year. Our fair value estimate is $20.50 and the shares are currently trading at a 57% premium.
Our valuation is driven by a positive outlook on Peter Alexander's growth trajectory, as well as higher group earnings before interest and taxes (“EBIT”) margins than prior to the pandemic, bolstered by an improving product and channel mix, as well as lower rental expenses.
However, we forecast cost of living pressures, rising borrowing costs, and relative weak global economic output to present earnings headwinds in fiscal 2024, but nevertheless we forecast a longer-term trend of increasing earnings from a normalised base. We estimate that the company should deliver a low-single-digit 10-year earnings per share compound annual growth rate from fiscal 2023, as promotional activity increases and wage costs rise.
We assign a no-moat rating to Premier Investments, as the company lacks long-term, enduring competitive advantages. Premier has a relatively large store footprint with some 1,200 stores across seven retail chains, which are targeted at differing demographics.
The group has strong sourcing capabilities with over 90% of the product range designed, sourced, and sold under its own brands. However, the Australian clothing retailing industry is highly fragmented, and the company’s business model can be easily replicated. Its brands are mid- to low-end and have little brand equity, leaving Premier with low pricing power over consumers.
CBA (ASX: CBA)
CBA is gaining on BHP as the largest company trading on the ASX. This growth in market capitlisation is a result of a 30% gain in the last year. The strong performance has lifted the share price to a 42% premium to our fair value estimate of $90.
We assume home loan growth slows in fiscal 2024 as higher cash rates affect demand and borrower capacity, and margins soften modestly. Commonwealth Bank is expected to make modest market share gains over the medium term, and we assume total lending growth averages 4% over the next five years.
Net interest margins stabilize around 2.05% by fiscal 2026, reflecting loan repricing, increased competition, and higher wholesale funding costs. Banking fee income continues to decline, reflecting customer and public pressure on bank fees. Operating costs are well contained, a combination of reduced headcount and ongoing investment in IT capability, seeing the cost/income ratio improve to around 42% in fiscal 2028.
While we expect the bad-debt expense as a proportion of average loans to increase from the cycle bottom, in the absence of a severe and prolonged economic recession, recently tightened lending standards and low costs of debt make a return to historical averages unlikely over the medium term. The ratio peaked at 73 basis points in fiscal 2009 before dropping to 41 basis points in fiscal 2010 and 25 basis points in fiscal 2011. Return on equity reaches around 15% through to fiscal 2028.
CBA has the lowest dividend yield of the big 4 banks at 3.59% compared to a yield of 4.67% for NAB, 5.41% for Westpac and 6.18% for ANZ.
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