The agreed sale of Premier Retail’s apparel brands under the Just Group to Myer was a “better outcome than expected”, according to analysts at Jarden, and provides significant scope for Premier to re-rate further.
Jarden cited higher contribution from Peter Alexander and Smiggle - Premier’s key brands outside of Just Group - alongside a tax benefit via full franked component of distribution of Myer shares.
As part of the deal, Myer will shower Premier shareholders with 890.5 million shares, while Premier will hand over Jay Jays, Jacqui E, Just Jeans, Dotti and Portmans and $82 million in cash.
From this, Jarden analysts see scope for an implied Premier valuation above $40 per share, materially ahead of its current $29.50 valuation “which does not reflect value of franking nor longer term rollout for PA ⁄ Smiggle, which we will revisit should UK rollout be successful”.
The $40 predicted valuation is also ahead of Premier’s current share price of $33.28, higher than its recent low point of $30.88.
The transaction is still subject to a vote, alongside scrutiny from ASIC.
Jarden analysts said post proposed transaction, Premier (ASX:PMV) shareholders would own around 67 per cent of Myer, with the combination to generate more than $30 million worth of synergies - a figure Jarden analysts see as very conservative owing to an over 500bp gross margin discount (ex-concession) “which, alone, is worth more than $150 million.”
“In addition, the deal has scope to be highly tax effective for PMV shareholders via releasing PMV's >$300m franking balance (c$2 per share),” Jarden analysts shared in a note to investors. “From here, the key catalysts beyond the deal will be successful execution of the PA UK rollout (website and 3 stores in Nov) and getting momentum back to Smiggle, which could drive a further re-rate of PMV.”
Analysts over at Morgan Stanley offer another upside to Premier’s valuation, noting that while Premier will hold onto its two other lucrative brands - Peter Alexander and Smiggle - it will also retain a 26 per cent stake in Breville.
“We like these businesses, given they have structural growth tailwinds from global expansion optionality, offer differentiated value propositions supported by innovation/branding and are highly profitable.
“New-PMV is likely to be more attractive to 'growth' investors.”
Morgan Stanley analysts also see material synergies from higher vertical product penetration, store rationalisation (with Myer/Apparel store overlap), overhead synergies and higher loyalty.
They also think the $30 million in initial synergies will prove to be conservative.
Moreover, they also highlight valuation upside as conglomerate discount reduces for why the deal makes sense.
“A complete break-up would fully remove the conglomerate discount but would also come with dissynergies. Selling Apparel to MYR is the next best option for s/holders, in our view.”
Overall, Jarden analysts said that Premier is a well-run business, with proven resilience through macro volatility.
“We see the apparel demerger as a positive, albeit the weakness in Smiggle needs to be addressed to drive a (material) re-rate,” they wrote.
“We see significant benefits to PMV from the MYR deal, notably scope to expand PA ⁄ Smiggle distribution in MYR, franking release and scope to re-rate PA ⁄ Smiggle closer to global fashion peers that trade on multiples >14x EBIT vs. the c12x implied by the brands today.”
On another note, Morgan Stanley analysts believe that the potential de-mergers of Peter Alexander and Smiggle - which Solomon Lew recently confirmed was still in relative consideration - are less likely to go ahead.