Myer will acquire Premier Investment’s Apparel Brands business in Australia and New Zealand (Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E) in exchange for the issue of new shares in Myer to Premier. The $1 billion transaction represents 890.5 million new Myer shares and a $82 million cash consideration.

The shares issued to premier represent 51.5% of Myer’s enlarged share base. Premier will distribute its existing and new shares in Myer to shareholders. Following this distribution, Premier will no longer own any shares in Myer as Premier shareholders would become direct Myer shareholders.

What we think

Morningstar estimates that Myer may be overpaying slightly for the five apparel brands sold by Premier on a stand-alone basis. Despite this, we expect the cost savings to materially lift earnings.

The merger appeals to both Myer and Premier shareholders. The key appeal for Premier shareholders is the franked dividends that the company intends to distribute through new Myer shares. As of July 2024, the company had almost $300 million in franking credits that could potentially be distributed at approximately $1.80 per share.

Where does this leave Premier and Myer?

Myer Holdings Limited MYR ★★★

  • Fair Value: $0.83
  • Share Price: $0.91 (as at 30th October 2024)
  • Moat Rating: None
  • Price to Fair Value: 1.1 (Overvalued)

Myer shares fell 7.2% after the transaction announcement

We raise our fair value estimate by 11% to $0.83, factoring in the expected cost synergies from the merger. On a stand-alone basis Myer has a valuation of $0.75 per share.

Our sales outlook for the new merged Myer group is muted with a sales CAGR of 1% over the next decade, in comparison to 2% for the five years to fiscal 2024.

As ecommerce continues to erode brick and mortar stores, Myer’s store-network has been diminishing with floorspace 14% lower than in fiscal 2018 although sales have increased since.

Despite the wealth effect generated by housing appreciation, revenue has only risen by an average annual rate of 2% in the past five years.

The group’s balance sheet remains health with a net cash position of $100 million. Over the decade we expect the current operating lease commitments to decline as sales shift to the online channel and floorspace continues to decrease.

Premier Investments Limited PMV ★

  • Fair Value: $20.50
  • Share Price: $33.28 (as at 30th October 2024)
  • Moat Rating: None
  • Price to Fair Value: 1.6 (Overvalued)

Shares in Premier lifted almost 7% in few days following the announcement. We maintain our fair value estimate for at $20.50 per share. Despite the attractive price paid by Myer, the benefit is small to the multi-billion-dollar enterprise value and therefore immaterial.

Morningstar forecasts the remaining brands (Peter Alexander and Smiggle) within Premier group to grow sales at a compound 6% annually over the next 10 years. This growth is down from 8% which was the five year compound growth rate to fiscal 2024.

The key driver of revenue growth is the Peter Alexander brand who compounded sales by 15% in the five years to fiscal 2024. Premier’s other brand Smiggle has had stellar sales growth over the years but has since reached maturity in Australia and its global market.

Like Myer, Premier has a strong balance sheet and current sits at a net cash position.

Concluding thoughts

Both Myer and Premier shares are significantly overvalued. The discretionary retail space is a platform for intense competition among retailers and are further threatened by the continued proliferation of Amazon and new Chinese ecommerce entrants Shein and Temu.

Challenges lie ahead as we expect e-commerce to grow much faster than in-store sales over the next decade. As we’ve seen with Myer already, wages and rent rising more than in store sales has led to a deterioration of store economics for omnichannel retailers that shrink store networks.

e-commerce growth vs in store sales

Source: Morningstar. October 2024. 

 

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Terms used in this article

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.