EUR 850.00 For Business Accounts Only

Morningstar | Super Retail’s Margins Under Pressure From Competition and Wage Inflation; AUD 7.50 FVE Unchanged. See Updated Analyst Note from 30 Apr 2019

Shares in no moat-rated Super Retail Group remain overvalued following the company’s trading update for the 43 weeks to April 27, 2019. We maintain our fair value estimate of AUD 7.50. The negative impact of weaker-than-expected sales growth in the core auto and high growth outdoor segments were offset by the positive impact of the time value of money on our fair value estimate. We anticipate Super Retail to struggle to grow EBIT margins over the next decade, with group operating margins hovering around 8.7% over the period. Over the next three years, we expect stiff competition in the commoditised sport goods retailing segment to drive down its EBIT margins to 8% from over 9% currently. The auto segment enjoys some shelter from online competitors, as Supercheap Auto’s physical store network adds value for customers with in-store services. We expect EBIT margins in the auto segment to expand and largely offset the declines in sporting. Further to these competitive headwinds, a new enterprise agreement, or EA, will likely weigh on near-term EBIT margins, especially in fiscal 2020. The proposed EA covers about 10,000 employees and would see store wages inflate by 5.8% in fiscal 2020, and by a further 2.9% in both fiscal 2021 and 2022.

For the group, we have lowered our fiscal 2019 sales growth estimate to 4.4% from 5.4%, in line with the reported year-to-date group sales growth of 4.4%. The sporting segment’s sales growth of 4.5% year to date was broadly in line with our previous forecast or 4.3%. However, we’ve lowered our estimates for the auto and outdoor segments to 3.6% and 5.7%, respectively, from 4.1% and 9.3% previously. Our 2019 EBIT margin assumptions, as well as our longer-term sales growth and EBIT margin estimates, remain unchanged. We estimate an EPS CAGR of 3.2% over the next five years.