Equity analysts at Morgan Stanley have indicated a bull case scenario of $41 per share for Premier Investments if the conglomerate goes ahead with a demerger and recovers from cyclical headwinds.
If there is no demerger and cyclical headwinds persist, the analysts told investors to expect a valuation of $31.50 per share.
At time of publishing, Premier's share price was $25.52.
In late August, Premier announced a formal review to assess its corporate, operating and capital structure, with particular focus on its apparel brands - including Portmans, Just Jeans, Jay Jays, Jacqui E and Dotti - Peter Alexander, and stationery and accessories brand Smiggle.
According to Premier, the review will consider a range of options, and “will include a review of Premier’s corporate, operating and capital structure, including dividend policies and a separation of the group into two or more distinct entities by way of demerger.”
Morgan Stanley analysts said cyclical headwinds have skewed Premier’s earnings risk to the downside over the last 6-12 months, but said this is better than expected.
They add that the potential demerger makes strategic and financial sense, with more capital and focus as separate entities and higher multiples for growth assets such as Smiggle and Peter Alexander.
“Our work with the AU Macro team suggests demerger outperformance is best realised over a two-year period.”
Media reports suggest Premier could be split into four listed companies; Peter Alexander, Smiggle, Apparel (Just Group), and Investments - Premier has shareholder investments in Breville Group (26%) and Myer (29%).
Another report published by Ragtrader indicated that Peter Alexander and Smiggle could be the two potential candidates for demerging, leaving Apparel and investments together.
According to Morgan Stanley analysts, Peter Alexander is Premier’s fastest-growing brand over the last decade at a compound annual growth rate of 16%, and is the largest of Premier’s portfolio in terms of revenue.
Peter Alexander has 126 stores across Australia and New Zealand, with 20-30 more new stores on the cards, as well as offshore expansion plans including in the United Kingdom.
“In recent years, Peter Alexander has been viewed as a COVID beneficiary,” Morgan Stanley analysts noted to investors. “However, it is on track for sales of c. A$450mn in FY23E (80% higher than the c. A $250mn in FY19A).
“There were clearly no lockdown benefits in FY23, suggesting that Peter Alexander has reached a new, sustainable base from which to grow in the medium term.”
Smiggle is the second largest in terms of revenue, with 305 stores across Australia, New Zealand, Singapore, Malaysia and the United Kingdom, as well as 350 wholesale channels.
The Apparel (Just Group) market has no plans for store growth and the market is highly competitive.
Just Jeans is the largest brand in the cohort at 37% of sales, followed by Jay jays (22%), Portmans (19%), Dotti (13%) and Jacqui E (9%).
“Apparel is more mature, posting a +3% CAGR in the 10 years to FY23E,” analysts noted. “We model flat growth out to FY26E, given there are no plans for store growth and the market is highly competitive – e.g., Zara, H&M, The Iconic, etc.”
Premier’s retail arm expects to report a total global sales of $1.64 billion for the 52 weeks ending July 29, 2023 - up 9.7% for the prior financial year.
In a recent trading update, Premier Retail noted it expects a record FY23 earnings before interest and tax (EBIT) in the range of $355.0 million and $357.0 million. This represents an increase between 6.0% and 6.6% on FY22 and between 112.2% and 113.4% on FY19.
Premier intends to release its full year FY23 results later this month.