MARKETS SPECTATOR: Cold shoulder for Myer

Myer's surprise first-half results failed to impress Credit Suisse and UBS which both cited cost headwinds for downgrading the stock.

Following Myer's stronger-than-expected result yesterday, both UBS and Credit Suisse have moved to downgrade the stock with the former cutting it to neutral from buy and the latter lowering it to neutral from outperform.

The result was in line with UBS estimates and about 4 per cent above what the market was expecting. The broker noted that against a backdrop of the rising cost of doing business, deflation and declines in store traffic, the retailer's result was strong with sales rising 2 per cent and like-for-like sales momentum increasing over the half and second-quarter LFL sales up 1.7 per cent versus 0.8 per cent in the first quarter. Cash flow was the highlight of the result, according to UBS, with operation-free cash flow up around 23 per cent year-on-year and $77 million of working capital released.

“While we continue to believe Myer offers the greatest leverage to an improving macro backdrop, with Myer outperforming the ASX 200 by approximately 27 per cent over the quarter, we moved our rating to neutral from buy. We believe earnings per share upgrades are required to drive near-term outperformance, which are unlikely until current year 2014 when cost pressures alleviate, in our view. We continue to prefer Myer over David Jones."

Elsewhere, Credit Suisse noted that the result was solid and ahead of market expectaions, but at the same time flagged cost and operational headwinds that will hold back earnings in the second half of 2013.

“Absent those effects, the business appears to be on an improving trend resulting in increasing confidence that financial year 2013 will be the floor to earnings declines of recent years,” Credit Suisse said.

Nonetheless, the broker believes the stock is likely to take a breather after a strong run and on second-half cost pressures. It notes that Myer is trading close to its discounted cashflow valaution of $3.12 per share, and at 13.9 times financial year 2013 EPS it continues to trade at a discount to the Australian discretionary retail sector, which sits at 16.2 times financial year 2013 EPS.

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