ASX Weekly Wrap 12/03 - 16/03

Welcome to the first ‘Weekly Wrap’ of 2018. It only took me until mid-March to get it out. Hope you all enjoyed the ‘Review of 2017’ & ‘Preview of 2018’ pieces I released over the last couple of weeks. I feel they covered some important ground and if you have any questions or comments regarding them please feel free to pass them on.

Not a great week to start the weekly articles on again, but we had to start somewhere. Market was very muted last week as it continued to tighten its range. It also had very little economic or company news to guide it, plus Monday was also a public holiday for half the nation. The XJO ended the week down 13.80 points or -0.23%. It hasn’t been a great start to the year with us pulling back 1.91% thus far. This is very much a similar trend to 2017, where we had a strong bull run to finish 2016 then a claw back which saw our lows around April/May in 2017 and then a very positive finish to the year to claim multi year highs. I feel the start of the year for the ASX is very dull due to many public holidays locally, a long festive season and school holiday period and then Chinese new year. China doesn’t really kick into gear until after Chinese New Year, which was later this year in February. I will provide more technical analysis for the XJO later on.

Most of the notable economic news came from abroad this week with China providing its monthly dump of data. Retails sales, industrial production and fixed asset investment where the focus again with all coming in ahead of forecasts. Retails sales hit +9.7% ahead of the +9.6% forecast and last month’s +9.4% read. Industrial production came in at +7.1%, well ahead of the +6.1% expected and last month’s +6.2%. Finally fixed asset investment came in at +7.9% again ahead of the +7.0% forecast and +7.2% read from last month. All figures are pointing a very healthy and robust Chinese economy. They also are helping to ease fears of a Chinese slow down. Not much else to say here as it looks much of the same as we saw in 2017 from the world’s second largest economy.

The second piece of economic news is brief but still important. The US released its CPI figures for February on Tuesday night. The figures came in at +0.2% for the month and +2.2% on year. Both figures were on forecast and the annualized figure was slightly larger than last month, which showed a +2.1% read. Not much to say here except inflation is still on the lower side of things but is showing some improvement. It’s not, however, enough to spook the market into thinking rates are going up faster than currently anticipated.

One of the only major pieces of company news to come out last week was from Premier Investments (PMV). The retail group, led by Solomon Lew, released its half year results to the market, which in the end they were very well received. PMV saw underlying NPAT grow by 9.4% ($78.6mill) for the first half of 17/18 with sales +7.0% to $630.1mill, like-for-like sales +2.4% and a record interim dividend of 29cps (fully franked). The improvement in underlying business came from a +26.7% increase in sales from Smiggle and +15.0% growth from Peter Alexander. Online sales also saw a large boost growing 71.2% from this time last year to $56mill. PMV had set a $100mill online sales target for 2020, but look set to eclipse that two years earlier.

On the face of it all PMV is operating a very healthy and strong business. They have had 6 consecutive first halves of EBIT growth with it coming in at $102.5mill this year. This is the first time it has ever eclipsed the $100mill mark. EBIT as a percentage of sales continues to increase as well coming in at 16.3% vs 12.7% it saw in 2013. This a very important stat as it shows costs remain under control whilst sales and margins continue to increase. The cost of doing business as a percentage of sales also fell this half by 144bps to 47% as 10 stores were closed and 82 stores over the last 5 years. PMV has made it a focus to close its unprofitable stores over time thus helping improve its margins along the way. These are mostly from its clothing lines such as Just Jeans, Jay Jays, Jacqui-E etc. They even cite such reasons as unrealistic rent expectations from the Bourke street mall, as reason for shutting down such stores. This is prudent capital management in my opinion.

PMV really is a story of two very successful brands at the moment. Smiggle is exploding and has really taken off in the UK as the region makes up the largest percentage of sales. They now have 332 stores globally, up from 272, and sales have grown from just $54mill in 2013 (first half) to $171mill this year. The UK alone is on track to hit $200mill in sales itself by 2019 as 30-40 new stores are added in 2018. Smiggle now operates in Australia, NZ, Singapore, Hong Kong, Malaysia, UK, Ireland and soon the Netherlands and Belgium. PMV are very picky where and when to open stores in other countries looking for a high percentage of stationary sales per capita, high percentage of English speaking citizens and high shopping centre penetration. I not sure why Smiggle is so popular with the Tween and Teenage age group, but they can’t seem to get enough of it. It’s the type of brand that is also resistant to Amazon as there is strong loyalty to the brand and IP. In fact if PMV were to embrace Amazon they could see the Smiggle brand grow stronger as another avenue for sales. There is no doubt Solomon Lew is onto a big winner here.

Peter Alexander is a great turnaround story, from a global chain that was once in the hands of The Just Group, to one more centralized and concentrated in Australia and NZ in the hands of Solomon Lew and PMV. PA almost went broke a few years ago and this is where PMV swooped. They shut down all stores outside of Aus/NZ and concentrated on restoring the brand. They have taken advantage of the pop culture trend with many of their clothes featuring marvel, star wars and children’s cartoon characters. They also rotate these in and out of the available lines making them more limited and hence more desirable. They also benefit from special occasions such as Christmas, Easter, Father’s Day etc. and match their lines with those occasions. PA sales have grown from $51mill (first half) in 2013 to $114mill this year, whilst also increasing their stores numbers from 59 to 120 in that time. PMV is to roll out its plus size, bath & body and expand on its children’s wear up until 2020. Again like Smiggle there is strong loyalty to the brand and PMV expect annual sales to exceed $250mill by 2020. PMV relationship with the fashion designer Peter Alexander is strong and he remains the lead creative design for the PA business. Having him on board gives PA a niche and exclusivity in the retail fashion world. PA has built a lot of brand loyalty, like Smiggle, despite its expensive price tag and I should know. My wife loves shopping there for herself and our sons. I must admit I do have some PJs from PA myself.

Online sales for PMV have really taken off the last few years after the group decided to make it a focus as far back as 2011. In 1H13 online sales made up just 2.5% of total sales, but in 1H18 this has grown to 10.2%, and as I mentioned earlier will eclipse their $100mill in sales target two years early. They haven’t set a new target just yet but it’s refreshing to see such an acceptance and push towards the future by PMV as they really lead the way into this ever-changing retail environment. Maybe some other retail chains, looking at you Mr. Harvey, should look to do the same.

The elephant in the room is really PMV’s Myer (MYR) investment, which is worth half of what it was, when they initially acquired it. Mr. Lew has publically shown his disdain for the MYR board on numerous occasions urging shareholders to vote against remuneration increases and calling for an EGM for certain members to be ousted. We aren’t entirely sure what PMV is going to do with MYR at this stage. One would assume, with their 10%+ stake, it would eventually result in a takeover, but it’s hard to see value in the department store market at the moment and especially one with such long term and expensive leases. PMV has a history of grabbing brands when they are on their knees so maybe they are waiting until the eleventh hour to make their move. As Peter Alexander and Smiggle have proven Solomon Lew is the man to turn a brand around if there ever was one. On the positive side of PMV’s investments comes their stake in Breville Group (BRG). This has been of a great success costing them a mere $221.3mill and it is now valued at $447.4mill (approx. 28% of BRG). PMV certainly has an eye for brands on the up, maybe MYR is next?

In the end what do I think of PMV? If PMV was just Smiggle, Peter Alexander and the Breville Group investment, I could even swallow Myer, then I would be all over this and have it included in every suitable portfolio under my management. Alas this is not the case and PMV is littered with dying retail brands. Smiggle and PA make up 45% of PMV sales now and I feel this is only going to grow. I feel as time goes on those stores will continue to close as leases expire and eventually they will be sold or written off. There is no doubt in my mind that Solomon Lew is one of the best, if not the best, retail minds in Australia. Maybe he is going to use the Myer vehicle to become one big store for Just Jeans, Dotti, Portmans etc. and close down their individual stores? Who knows? On a valuation basis PMV is not cheap coming in at 20x PE but with $185mill in cash and $380mill debt it has sufficient capital and gearing room to grow as it pleases. It also boasts a 3.9% fully franked yield at current prices. Despite my bearishness on the global retail environment I am very bullish on PMV moving forward based upon their two major brands in Smiggle & Peter Alexander and management of Solomon Lew. However the stock recently gapped up on the back of these earnings and needs time to fill that and shape again. I would be looking for entry around the $14.50 mark (current price $15.30) based upon that. Whilst the retail apocalypse is still to play out there will be those with a niche that survive and benefit from it. I believe PMV will be one of those. I tip my hat to you Mr. Lew.

The other major news to spill from the markets last week came from Wesfarmer (WES) and their plans to demerge the Coles business. The details are thin at the moment but plans are for WES to spin out Coles by end of FY19 into a separate listed entity. WES would retain up to a 20% stake in the company and all WES shareholders would receive new shares in the listed Coles business. WES cite they are looking for higher growth businesses and say that Coles is a much more defensive focused brand. They also state that Coles accounts for 61% of the groups capital requirements whilst only producing 34% of its EBITDA. Basically they are saying the ROE in Coles is not all that flash. This is basically all we know at this stage.

I believe WES are exiting Coles now, whilst they still can. They realise the business has peaked and that margins will be squeezed and growth harder to come by moving forward. No doubt they will load up Coles with a high yield to make it attractive to retail shareholders and to keep them from selling it down. Whilst details are still scarce you couldn’t pay me to hold shares in a separate Coles’ business at this point in time. That is all I can really say for now as it still has to be approved by all parties and more details are to be revealed. I will keep you updated as more information comes to hand.

I normally don’t cover news from small caps within this newsletter as most of my client base invests in the larger end of town. Since I have made a focus of lithium in the past and I see it as a significant part of the future I feel it was appropriate to cover this piece of news and news of a select few companies moving forward. Altura Mining (AJM) responded to rumours regarding a possible takeover of the company. It revealed it has been, and continues to be, in talks with its major shareholder in Chinese group Shaanxi J&R Optimum Energy Co. Ltd regarding a potential control transaction. Shaanxi already owns almost 19% of AJM and is also an offtake partner, hence the company is familiar to them. AJM stress the talks are confidential and nothing binding has been agreed upon.

AJM shares have risen from around 36c at the time to now trade 48c on the back of this speculation. It is my opinion is if Shaanxi want AJM they will have to pay a hefty premium, which becomes more expensive every day. AJM’s prospects are very bullish as only last week it released more infill drilling results which showed thick lithium intercepts at high grades. This included grades such as 41m @ 1.20% & 59m @ 1.34% Li from almost the surface. AJM currently has an ore reserve estimate of 34.2mt @ 1.04% Li and mineral resource estimate of 44mt @ 1.00% Li. This means that some of that mineral resource estimate should be able to be upgraded to the ore reserve estimate and add significant value to the project. This will only increase the amount Shaanxi will have to pay.

It certainly is a seller’s market and AJM should be in no hurry to sell unless their offer is too good to refuse. I have said it before in my newsletter’s and on social media that there will be a lot of M&A activity in the lithium space in 2018 as Chinese battery manufacturers look to secure supply in the short term. AJM isn’t the first this year as two offers have been made to two separate Canadian lithium firms by Chinese battery makers as well. This also won’t be the last and we could see a large player such as PLS, ORE, KDR etc. taken out in the near future. I first mentioned AJM back in July 2017 @ 12.5c, again in September 2017 @ 22.5c and finally in my 2018 preview two weeks ago @ 34.5c. Holders should be very happy with how things have progressed, especially if you got in at 12.5c and are sitting on 384% in gains as of today’s close.

It was a lean week for most sectors as the market did some running on the spot. Resources fared well seeing 1.61% in gains after a lean few weeks. The retail sector also bounced 2.23% after PMVs results and WES plans to demerge Coles. Gold was hit hard down 2.53% as the underlying metal price lost ground. The banks were down 1.94% as the royal commission began and aired some of the sector’s dirty laundry and telecommunication were down 2.53% continuing their awful trend in 2017. As you can see most sectors are down for the year reflection the almost 2% loss we have seen on the XJO. Health care has been a shining light as volatility returned they once again act as a defensive sector to rotate in to. They also have a lot of operations in the US so are set to benefit from the new US tax scheme in the near future.

The XJO still is trading in a bullish wedge within our continued uptrend. It wants to break above that red line around 6,050 if we want to go higher and see 6,200 in the near term. If we can’t hold support on the green line then we may dump into 5,800 before our next move up. Usually in a bull market these patterns end up breaking to the upside but we will have to wait and see how it all plays out.

For such a quiet week we certainly had enough to talk about. I went a bit longer than expected on the PMV result but figured it was a good time to go a bit deeper on it considering the lack of company news. The ‘Weekly Wrap’ should become a regular Monday installment again moving forward so look for another one next week before we head into the Easter break. Footy is back this week. It only seemed like last week I was drowning my sorrows after the grand final loss. It’s time to move on and for bigger and better things in 2018. Playing Essendon away on a Friday night with key players likely to be missing is a tough assignment first up though. Was a few firsts for me personally over the last few weeks. We had our first family holiday, since our two little guys were born, on the Adelaide Cup long weekend. Just ended up hiring a cottage at Port Elliot with family and has an awesome time. My wife also took our eldest to his first movie on the weekend. Took him to see the new Peter Rabbit film at a family session. By all accounts he really enjoyed it. Finally we take him to his first dentist’s appointment tomorrow morning. It will be very interesting to say the least. I will leave it there. Have a great week all and try and stay safe. I’ll speak to you all next week. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.