Myer: Interim result 2016

Upon upgrading Myer last year, we said the stock was 'excellent value'. Today's interim result suggests the department story group is not the basket case the market had been assuming. New management with new ideas and a new strategy is already making a difference although – before we get carried away – it's still early days.

Sales are not yet booming, despite a strong Christmas and stocktake sale. Total sales (including concessions) rose just 1.8% to $1,795m but, drilling down, the numbers were better. Most importantly, sales growth was much stronger in the flagship and premium locations, reflecting a renewed focus on these stores.

Somewhat surprisingly cost control was better than expected, with the company's cost of doing business falling 2.5%. While earnings before interest and tax fell 6% to $94m, net profit fell just 4% to $60m due to lower interest costs (as last year's capital raising allowed debt to be repaid).

In Is Myer still a pariah?, we said we would be looking for confirmation of two things in 2016 – a turnaround in cash flow and the reinstatement of dividends. In this result we got both.

Operating cash flow was $197m, although that reflected seasonal strength and the old management trick of delaying payments to suppliers. After passing last year's final dividend, directors decided to pay a fully franked 2.0 cents this half (ex date not yet known).

Having reviewed our valuation again, we were probably too conservative last year (although we won't apologise for that). Today's result confirmed there remains value in the stock.

Normalising net debt – it was a seasonally low $7m at period end – Myer is trading on an enterprise value to 2016 EBITDA multiple of approximately six times. The stock is also trading on an estimated 2016 free cash flow yield of 12%-14% (although perhaps a little lower in 2017 as capital expenditure ramps up).

With the share price up 12% since Myer downgraded, it's obviously less attractive. But today's result confirmed the stock is still underpriced and – dare we say it – the risks look more manageable too. We'll publish a full review fleshing out these points on Monday but we're upgrading the recommendation in the meantime. Myer is a SPECULATIVE BUY to $1.25 for up to 3% of your portfolio.

Note: The stock is right on the cusp of our downgrade price, but we feel there's some chance it will return below this price in the days and weeks ahead. Patience is advised.