A takeover of department store chain Myer by Solomon Lew’s Premier Investments could see savings in rent of about $23 million, according to Citi.
Retail analysts at the broker said if Premier were to acquire Myer, rental savings from shifting the footprint of 200 specialty retail stores into the department store could yield «about $23 million in net savings», underpinning 28 per cent earnings per security (EPS) accretion at a $1 takeover price for Myer, in our view».
«Despite what appears to be attractive merger economics, this would likely be outweighed by the risk of exiting about $1.2 billion of long-term leases on ‘mainstream’ and ‘community’ Myer stores,» the analyst said.
Mr Lew’s retail business owns about 11 per cent of Myer and last week he requested the chain’s share register, which was seen as a move to gain investor approval to agitate for change in the Myer management.
Post Myer’s results, Mr Lew said the group, which he ran when it was Coles Myer, had «lost its way», adding it was a «basket case».
According to Citi analyst Craig Woolford, Mr Lew’s request for the share register of Myer could be to petition investors to support changes in management and board, as well as a potential board nomination for a Premier Investments representative.
«Given Myer’s recent sales, earnings and share price underperformance, this might be viewed favourably by Myer shareholders given the historical success of Premier Investments’ retail brands and strategy,» Mr Woolford said.
«Our buy/high risk rating on Myer is based on the view that takeover risk has been underpriced and that Myer will survive this challenging retail environment, particularly in apparel and footwear.
«We have a preference for Premier Investments given the growth in Smiggle and Peter Alexander, but would become more cautious should they launch a takeover offer for the remaining 89 per cent of Myer. This announcement more likely reflects the potential for Premier to drive strategic changes for Myer, which is likely to be welcomed by investors,» he said.
Solomon Lew looks like he’s agitating for change of the Myer management. Photo: Josh Robenstone
Mr Lew’s request and Myer’s weaker results reflect the current volatile times for retail stocks and the underlying consumer market.
Compounding the tight market, where all retailers are in the midst of the mid season sales to clear out winter stock, is the imminent arrival of online giant Amazon to Australia.
Given Myer’s recent sales, earnings and share price underperformance, this might be viewed favourably by Myer shareholders.
Citi analyst Craig Woolford
In the August reporting season, the Australia retail real estate investment trusts all experienced negative financial year 2018 EPS earnings revisions since June 30, while all AREITs with office and industrial exposure experienced positive revisions.
David Lloyd from Citi said he views the earnings revisions as a key indication of a stock’s potential relative performance.
«Macro factors including low wages growth, increasing living expenses, such as utilities, declining savings ratio, and rising mortgage rates, combined with sector specific factors including downtime from remixing, decelerating store roll outs or store closures, and fixed rental bumps greater than sales growth, leading to negative releasing spreads, continue to indicate EPS risk is skewed to the downside, in our view,» Mr Lloyd said.
But JP Morgan’s US analysts said they were now looking to switch back into retail REITs away from the industrial sector, which has had a big run in the past year.
Richard Jones, from JP Morgan Australia, said the most notable change is they now see a trading opportunity to swap out of industrial REITs and into retail REITs…particularly the malls where short interest has spiked.
«This view is consistent with our overweight call on Westfield and underweight call on Goodman Group», Mr Jones said.
Goodman has been keenly watched in Australia with the of e-commerce which has seen demand for warehouses rise dramatically.
It has been widely tipped that Amazon will look to develop a large fulfillment centre at Goodman’s Eastern Creek, Oakdale Industrial Park in NSW. Goodman chief executive Greg Goodman has declined to comment on the speculation.