11/5/2018 Analyst Report

Submitted by:
Group 1
Heena Moorpana (MM18GF033)
Nikunja Nawal (MM18GF037)
Sandhya Gudipalli (MM18GF039)
Shrivardhan Mandhanya (MM18GF042)
Contents
Introduction:.................................................................................................................................................. 2
Industry and Competitive Environment: ....................................................................................................... 5
STRATEGY ANALYSIS .................................................................................................................................. 7
Historical Analysis ...................................................................................................................................... 10
Financial Forecasting and Valuation........................................................................................................... 11
Recommendation:....................................................................................................................................... 17
References:.................................................................................................................................................. 19

1
Introduction:

Main business and history of the company

Founded in the year 1900, Bendingo, Victoria, Australia by Sidney Myer, Myer
Group is an Australian upmarket departmental store
RECOMMENDATION: BUY
chain being established all across the country. Myer
PRICE: AUD$ 0.480 group sells a broad range of products consisting of
TARGET PRICE: AUD$ 0.800 womenswear, menswear, baby products,
STOCK DETAILS childrenswear, apparel, beauty products, cosmetics,
ASX CODE: MYR
computers and electric goods, footwears, toys,
MARKET CAP (AUD M):
390.1074 handbags and general merchandises etc. The company
52 WEEKS HI/LO: 0.81/0.35 has its retail stores in all the cities of Australia (more
SHARES OTS (M): 821.27 than 64) except Darwin and is even located in small
AVG. DAILY VOLUME (M): 1.5
areas like Newcastle, Dubbo, Wollongong, Cairns and
Sunshine coast etc. Myer Group has its headquarters in Docklands, Victoria,
Australia and employs more than 14,000 employees. The company is public and
traded on Australian Stock Exchange (MYR).
The company’s stores are visited by more than 130 million times each year and the
company are committed to responsible business growth and integrates CSR activities
and all aspects of sustainability. The company is completely engrossed into
philanthropic activities and with the help of its team members, suppliers and
customers, it has raised nearly 25 million dollars over the past 13 years. To increase
the loyalty of the customers, the company has recently launched Myer One program
in 2017 and despite the fall in the growth and profit figures the company has been
able to combat the slowdown through its new strategies like omni-channel approach
and focusing on productivity as well as efficiency, Myer Group’s new strategy is
built on four priorities:
1) Customer led offer
2) Wonderful experiences
3) Omni-channel shopping &
4) Productivity step-change
Company’s financial performance is as follows:

2
 Figure-01
Quality of Management
The recent directors of the company are:

Figure-02
6/8 or 75% of the members of the board of directors are independent directors. The
board of directors consists of members from multi-diversity background. The
company has a policy of maintaining diversity in the workforce as well as the
management. The directors have a well prior experience in different industries and
different geographies and come with unique qualities and core competencies in
several fields having been exposed to the industry for many years. The members are
of different ages and their core skills consist of consultancy, advisory, audit, finance,

3
marketing, sales and operations etc. The auditing part of the company is being
outsourced to one of the best auditors in the world i.e. Price water House Coopers
(PWC). The compensation of the executives of the company consists of three parts
i.e. total fixed compensation, short-term incentives and long-term incentives. There
is a separate committee in the company who looks over the remuneration policies
headed by Ms. Chris Froggatt and other members are Ms. Anne Brennan and Mr.
Ian Cornell. The committee is responsible for making recommendations to the board
on non-executive director fees, executive remunerations, the whole remuneration
framework and the health of the organization. The company also has external
consultants like Ernst & Young for remuneration advices.

Figure-03
The company also has a separate risk committee chaired by Joanne Stephenson and
other members are Anne Brennan, Bob Thorn and David Whittle. The company till
now has done various mergers and acquisitions, most famous of them are with
Geelong’s Lindsay stores naming it Target in 1968 and GJ Coles and Coy in 1985
naming it Coles Myer till date.
In 2015, Myer Group was blamed and investigated by Fair Work Ombudsman for
not paying well to its employees, not maintaining a good working environment
leaving its employees to pay their own taxes, insurance and superannuation. But the
case was resolved shortly and Myer has not been involved in any scam or scandal
till date.

4
Industry and Competitive Environment:

Various macroeconomic risks pertain for the company such as falling of GDP
growth rate from 0.9% YoY to 0.7% YoY in 2017, slump in retail sales and
consumer confidence had been detrimental for the company as the profit margins,
sales have decreased from the previous year. Various other factors such as change
in government policies, tax rate and falling of Australian dollar versus U.S. dollar
have been the major risks factors for the company. Till date, the Australian dollar
has fallen almost by 2.6% and could hurt the exports and foreign operations of the
company.
Besides the Australian retail industry faces a lot of competition by the new entrants
and growing market share of other existing entrants like Woolworths, Costco, IKEA,
David Jones etc. The company also faces regulatory risks from governing bodies
like Australian Tax Office, Australia Competitor and Consumer Commission etc.
The company mostly relies on technology, thereby being exposed to drastic shifts in
technology. Malfunction of IT systems, outdated IT infrastructure or cyber-security
violation might affect the sales and profit margins of the company.
In 2018, the market share of Myer Group and its competitors is as follows:

Figure-04
Over the years due to intense competition, mentioned risks the company is losing its
performance level in the industry. Below are the key factors that quantifies the risks:

Figure-05

5
 Figure-06
The company has seen a P/E growth of 2.22% with respect to the sector that has
faced a growth of 1.64% till date. The whole retail industry has faced a fall in growth
due to decreasing consumer confidence and retail sales which fell to record lows at
1.9% YoY in 2017.
Regulatory environment- Australia is governed by various regulatory authorities.
The major regulatory authorities in Australia are 1) The Australian Securities and
Investment Commission responsible for real time trading for the domestic markets
2) Reserve Bank of Australia responsible for licensed clearing and settlement
facilities 3) Treasury responsible for looking after the economic policy of the country
4) The Australian Prudential Regulatory Authority, a regulatory of financial services
in Australia and 5) Council of Financial Regulators, the coordinating body of the
main financial regulatory bodies.

6
STRATEGY ANALYSIS

SWOT Analysis
Strengths
• Myer is an Australian chain of upscale mid-to-high range departmental store.
• It has stores in all the states and capital territory of Australia.
• It gives consumer a lot of choices through variety of brands at affordable
prices.
• Brand recognition and brand image is very much strong in Australia.
• It gives customer-based service.

Weaknesses
• Its undeveloped distribution channels serve only in some parts of the
Australia.
• No global recognition as it targets only the Australian market.
• Its retail area prices are rising but still it has inadequate usage of area in
showroom.
Opportunities
• There’s an opportunity to tie-up with foreign players as they are dominating
the retail sector right now.
• They can enhance their promotional strategies through innovation so that they
can increase footfalls.
• Staff members should work effectively and efficiently to improve the
performance of the showrooms.

7
Threats
• Consumers tastes and preferences are becoming dynamic and their lifestyle is
changing day by day.
• Due to slowdown, customers are becoming more cautious about spending as
their disposable income is falling.
• It has been observed that it is difficult for Myer to target all the segments of
the society.
In order to combat the slowdown in the overall growth of the retail industry the
company adopted various strategies due to which it recovered its profit margins and
sales figures in 2018.
1) Customer led offer- Increased the product range as demanded by the
customers after extensive market research and created 360 in-store
destinations for new brands like Industrie, John Lewis, Jack & Jones and
several other brands.
2) Wonderful experiences- The company adopted new steps to attract new
customers by offering innovative customer experiences such as Myer
Christmas Giftorium, collaborating with Katy Perry to enhance the brand
name, opening up of cafes and pop up shops and improving fitting rooms etc.
3) Omni-channel shopping- the company strengthened online service to the
customers through one Myer app, offering right infrastructure and operations
and improved its payment platform etc.
4) Productivity step-change- The company focused on efficiency, waste
reduction and became cost focused. The company also optimized store
networks and implemented new workforce management tool in all its stores.
The Porter’s five forces of competition for Myer Group are as follows:
1) Threats of new entrants-New entrants in retail sector brings innovation, new
way of doing things and will put pressure on the company through lower
pricing strategy, reducing costs and providing new value propositions to the
customers. Therefore, in case of Myer Group threat of new entrants is high.
The company through innovation, maintaining economies of scale, building
capacities and investing more on research and development can keep the
threats to lower level.

8
 2) Seller’s power- The seller power is high in case of Myer Group which can be
lowered by maintain efficient supply chain and working with dedicated
suppliers with low negotiating power.
3) Buyer’s power- The buyer’s power is high as the switching cost for the
customers is low and the customer base of the Myer group is powerful and the
bargaining power of the customers is high. The company through innovation,
increasing its customer base can lower the buyer’s power.
4) Threats of substitutes- The company faces a great competition due to various
substitutes available in the market. The company can decrease the threats by
being service oriented rather than product oriented, focusing on customer
needs and increasing the switching cost of its customers.
5) Rivalry among the competitors- The rivalry is very high in the retail industry
in Australia to presence of new entrants and existing entrants like
Woolworths, Kmart, David Jones etc. The company though product
differentiation and collaborating with its competitors to increase its market
share can decrease the level of rivalry in the industry.

Myer Group has a great history of community investment and giving back to the
society. The company does so by engaging team members, suppliers as well as
customers. The company works with national partners like White Ribbon Australia,
Global Sisters etc. to promote women empowerment and reduce family violence.
The three main fundraising programs are the Myer community fund precious metal
ball, point-of-sale round up and team member fundraising activities at each store.
The donations go to Myer community fund whose working is seen by an independent
board. In FY 2017, the company provided $611,000to national community partners
which helped Salvation Army over 32,000 instance of family support, Global sisters
to achieve financial independence through micro business and retail marketing
support and helped prevent violence for women. The company’s total cash
contribution to the charity was $3.1 million in 2017 and facilitated $1.6 million from
suppliers, customers and team members.

9
Historical Analysis

Myer Group
S.No. Particulars Formula 2018 2017
1) Sales and Earnings growth
a. Sales /Revenue Growth (Sales in 2017/Sales in 2016)-1 -2.6% -5.7%
b. EBIT growth (EBIT in 2017/EBIT in 2016)-1 -7.9% -4.3%
c. Net income growth (PAT in 2017/PAT in 2016)-1 -4150.0% -80.3%

2) Profitability Analysis
a. Gross Profit Margin (Gross Income/Net Sales) *100 45.7% 45.8%
b. EBIT Margin (EBIT/Net Sales) *100 -29.3% -26.5%
c. Net Profit Margin (PAT/Net Sales) *100 -19.0% 0.5%

3) Efficiency
a. Total Asset Turnover (Net Sales/Total Assets) 1.9 1.4
b. Working Capital Efficiency (Working Capital/Net Sales) *100 -1.3% -2.2%

4) Solvency ratios
a. Current ratio (Current Assets/Current Liabilities) 0.95 0.89
b. Quick ratio (Current Assets-Inventories)/Current Liabilities 0.86 0.82
c. Operation cash flow ratio (CFO/Current Liabilities) 0.2 0.3
d. Debt to Equity Ratio (Long-term debt/Equity) 0.3 0.1
e. Liabilities to Asset ratio (Total Liabilities/ Total Assets) 0.6 0.4
f. Interest Coverage ratio (EBIT/Interest expenses) -83.2 -63.1
g. Operation cash flow ratio (CFO/Total Liabilities) 0.1 0.2

5) Market based ratio

a. P/E ratio (Price per share/earnings per share) 12.7 47.2
b. P/B ratio (Price per share/Book value per share) 0.7 0.5
c. PEG ratio Growth in P/E ratio -0.2 -55.1
d. P/S ratio (Price per share/sales per share) 0.2 0.2
e. P/CF ratio (Price per share/CFO per share) 3.6 3.6
f. EV/EBITDA EV/EBITDA 3.3 3.8

10
The growth figures declined from 2017 to 2018 and were negative in both the periods
because of higher cost of goods sold than the revenue and less revenue was due to
the slump in the industry as well as the company growth and due to the new entrants
in the industry. The store-exit costs and restructuring costs are also the contributor
for low margins of the company.
The company has increased its efficiency in the period. The company has a liquidity
concern in the short-term due to less current and quick ratio. Cash flow from
operations are not sufficient to meet the short-term liabilities. The company also
faces risk in long-term due to negative interest coverage ratio and cash flow from
operations are not able to cover the total liabilities and hence implies the solvency
risk.
Price to earnings ratio has decreased from 2017 to 2018 due lower earnings in 2018.
Besides, PEG ratio has improved which is a good sign for the company as well as
the investors. The company is not overvalued as it has a lower EV/EBITDA multiple
and is currently traded at a very low price i.e. A$ 0.48.

ROE (Du-Pont Analysis)

S. No. Particulars 2018 2017 2016 2015
1) EBIT Margin -0.29304 -0.26458 -0.2607 -0.24495
2) Tax burden 1.018519 2.5 1.327869 1.633333
3) Interest burden 1.513131 -23.1333 -8.95062 -13.8571
4) TATO 1.889135 1.395955 1.488758 1.468998
5) Financial Leverage 2.316781 1.751165 1.685921 2.186559
ROE -1.97658 37.40572 7.776898 17.80769

Overall, ROE of the company has decreased over the years from 2015-2018 due to
falling EBIT margin and increasing COGS, store-exit cost and restructuring cost.

Financial Forecasting and Valuation

Income Statement Forecasting

11
Particulars (in
1000 A$) 2017 2018 2019 2020 2021 2022

Sales 3,201,866.00 3,216,266.98 3,230,732.74 3,245,263.55 3,259,859.72 3,274,521.54

Concession - - - - - -
Sales 701,678.00 769,264.74 843,361.55 924,595.48 1,013,653.99 1,111,290.76

Sale of Goods 2,500,188.00 2,461,947.21 2,424,291.31 2,387,211.37 2,350,698.57 2,314,744.25

Sales revenue
under loyalty - - - - - -
program 34,847.00 34,113.53 33,395.50 32,692.59 32,004.46 31,330.83
Revenue from
sale of goods 2,465,341.00 2,427,836.68 2,390,902.90 2,354,530.98 2,318,712.37 2,283,438.66
Other
operating
revenue 176,485.00 173,800.20 171,156.24 168,552.50 165,988.38 163,463.26
- - - - - -
COGS 1,421,394.00 1,399,770.86 1,378,476.66 1,357,506.41 1,336,855.16 1,316,518.08

Gross profit 1,220,432.00 1,201,866.02 1,183,582.48 1,165,577.07 1,147,845.58 1,130,383.83

- - - - - -
SG&A 1,111,267.00 1,094,361.71 1,077,713.59 1,061,318.73 1,045,173.28 1,029,273.44
Share of net
profit/loss of
equity
accounted -
associate 1,176.00 - - - - -
Dilution of
investment
inequity-
accounted -
associate 1,338.00 - - - - -
Restructuring
and store exit - - - - - -
costs 65,615.00 55,059.11 55,780.64 56,576.53 57,454.43 58,422.82

EBIT 41,036.00 52,445.20 50,088.25 47,681.82 45,217.87 42,687.57

Finance
revenue 436.00 362.79 296.15 236.76 184.80 140.49
- - - - - -
Finance cost 11,259.00 11,078.92 11,078.92 11,078.92 11,078.92 11,078.92

EBT 30,213.00 41,729.07 39,305.48 36,839.66 34,323.74 31,749.13

- - - - - -
Taxes 18,274.00 25,239.37 23,773.49 22,282.06 20,760.34 19,203.11
PAT (Net
Income) 11,939.00 16,489.70 15,531.99 14,557.60 13,563.41 12,546.02

12
PROFORMA
STATEMENT
OF RETAINED
EARNINGS 2017 2018 2019 2020 2021 2022

Net Income 11,939.00 16,489.70 15,531.99 14,557.60 13,563.41 12,546.02

- - - - - -
Less dividends 49,276.00 28,585.00 26,924.81 25,235.68 23,512.25 21,748.60
Retained
Earnings for - - - - - -
the year 37,337.00 12,095.30 11,392.81 10,678.09 9,948.84 9,202.58
Opening
Retained
Earnings 379,483.00 342,146.00 330,050.70 318,657.89 307,979.80 298,030.96
Closing
Retained
Earnings 342,146.00 330,050.70 318,657.89 307,979.80 298,030.96 288,828.38

13
Balance Sheet Forecasting
Particulars (in
1000 A$) 2017 2018 2019 2020 2021 2022
ASSETS
Current Assets
Cash and Cash
Equivalents 30,591.00 31,535.54 25,742.84 20,579.98 16,063.30 12,211.60
Trade and
other
receivables 27,602.00 27,182.10 26,768.59 26,361.37 25,960.34 25,565.42

Inventories 372,374.00 366,709.21 361,130.60 355,636.85 350,226.68 344,898.81

Derivative
financial
instruments - - - - - -
Total current
assets 430,567.00 425,426.85 413,642.03 402,578.20 392,250.33 382,675.83

Non-current
Assets

PPE 460,211.00 453,209.98 446,315.46 439,525.83 432,839.49 426,254.86

Intangible
assets 985,657.00 985,657.00 985,657.00 985,657.00 985,657.00 985,657.00
Derivative
financial
instruments - - - - - -
Investments in
associate - - - - - -
Other non-
current assets 2,094.00 2,094.00 2,094.00 2,094.00 2,094.00 2,094.00
Total non-
current assets 1,447,962.00 1,440,960.98 1,434,066.46 1,427,276.83 1,420,590.49 1,414,005.86

Total assets 1,878,529.00 1,866,387.83 1,847,708.49 1,829,855.04 1,812,840.82 1,796,681.69

LIABILITIES
Current
Liabilities
Trade and
other payables 379,740.00 373,963.16 368,274.19 362,671.77 357,154.58 351,721.32

Provisions 87,295.00 85,967.01 84,659.23 83,371.34 82,103.04 80,854.04

Deferred
Income 9,817.00 9,667.66 9,520.59 9,375.75 9,233.12 9,092.66
Derivative
financial
instruments 7,944.00 7,944.00 7,944.00 7,944.00 7,944.00 7,944.00

14
Current tax
liabilities 1,627.00 7,823.15 7,704.14 7,586.94 7,471.52 7,357.86
Other
liabilities 591.00 1,602.25 1,577.87 1,553.87 1,530.23 1,506.95
Total current
liabilities 487,014.00 486,967.23 479,680.02 472,503.68 465,436.50 458,476.84

Non-current
Liabilities

Borrowings 143,367.00 143,367.00 143,367.00 143,367.00 143,367.00 143,367.00

Provisions 13,821.00 13,821.00 13,821.00 13,821.00 13,821.00 13,821.00

Deferred
income' 75,927.00 75,927.00 75,927.00 75,927.00 75,927.00 75,927.00
Deferred tax
liabilities 84,574.00 84,574.00 84,574.00 84,574.00 84,574.00 84,574.00
Derivative
financial
instruments 958.00 958.00 958.00 958.00 958.00 958.00
Other
liabilities - - - - - -
Total non-
current
liabilities 318,647.00 318,647.00 318,647.00 318,647.00 318,647.00 318,647.00
Total
liabilities 805,661.00 805,614.23 798,327.02 791,150.68 784,083.50 777,123.84

Equity
Contributed
equity 739,329.00 739,329.00 739,329.00 739,329.00 739,329.00 739,329.00
Retained
Earnings 342,146.00 330,051.60 318,659.47 307,982.36 298,035.31 288,835.85
Reserves - 8,607.00 - 8,607.00 - 8,607.00 - 8,607.00 - 8,607.00 - 8,607.00
Non-
controlling
interest - - - - - -

Total equity 1,072,868.00 1,060,773.60 1,049,381.47 1,038,704.36 1,028,757.31 1,019,557.85

Total
liabilities and
equity 1,878,529.00 1,866,387.83 1,847,708.49 1,829,855.04 1,812,840.82 1,796,681.69

15
Free Cash Flow Valuation
PRO FORMA
FREE CASH
FLOW 2017 2018 2019 2020 2021 2022

Net Income 11,939.00 16,489.70 15,531.99 14,557.60 13,563.41 12,546.02

Add
Depreciation 63,020.00 64,052.16 63,077.76 62,118.18 61,173.20 60,242.59
Less increase in
non-cash current
assets 34,555.00 6,084.69 5,992.12 5,900.97 5,811.20 5,722.79
Add increase in
non-cash current -
liabilities 34,388.00 1,649.02 8,865.08 8,730.22 8,597.41 8,466.62

CFO 75,126.00 88,275.57 93,466.95 91,306.96 89,145.21 86,978.02

Add net Interest
expense *(1-t) 17,369.17 17,197.66 17,304.61 17,399.93 17,483.32 17,554.43
Less
acquisition/(sale) -
of fixed assets 14,832.00 7,001.02 6,894.52 6,789.63 6,686.34 6,584.63

FCFF 77,663.17 112,474.25 117,666.08 115,496.52 113,314.87 111,117.08

EBIT*(1-t) 29,308.17 33,687.36 32,836.60 31,957.52 31,046.72 30,100.45

TA-Cash 1,847,938.00 1,834,852.29 1,821,965.65 1,809,275.06 1,796,777.51 1,784,470.09

RR - 1.65 - 2.34 - 2.58 - 2.61 - 2.65 - 2.69

ROC 1.59% 1.84% 1.80% 1.77% 1.73% 1.69%
FGR -2.62% -4.29% -4.66% -4.62% -4.58% -4.54%

Terminal Value 1,079.67

WACC 3.48%

EV 168,791.60

cash 30,591.00

Debt 152,269.00

Equity 47,113.60
Number of
shares 79,593.00
Intrinsic value
per share 0.59

Share price today 0.48

16
Valuation Result: As per the forecasting and valuation calculations shown above,
we can conclude that the stock is undervalued. This is because the intrinsic value as
per our calculation comes out to be $0.59 per share and Myer’s share is currently
trading at $0.48. Since the share is trading below than the true intrinsic value of a
share, it is an undervalued share and is anticipated to rise in future and therefore, our
advice to investors would be to buy the share.

Recommendation:
Looking at the valuation the intrinsic value of the share comes out to be $0.59 per
share and the current share price is $0.48 per share showing that the stock is
undervalued and the investor should buy the share looing at the opportunity. Looking
at the ROE of the company in 2018 it turns out to be negative i.e. -2% which is due
to the fact that the company has lots of costs incurred due to the store-exit costs,
restructuring costs etc. The company has shut down almost its non-profitable
operations.
Looking at the Porter-5 analysis the company has faced severe competition form the
new entrants and it can increase it profit margin in the upcoming years by decreasing
costs, involving in innovation and investment in R&D, creating new product line
and knowing the customer actual needs and demands before launching any product
or continuing the existing product in the market.
The company has also invested a lot in marketing its brand name by collaborating
with various renowned enterprises and celebrities like Katy Perry. The company has
changed its strategy to 4-pillar strategies i.e.
1) Customer led offer
2) Wonderful experiences
3) Omni-channel shopping &
4) Productivity step-change
This strategy has worked well and is expected to give positive results in the future.
Looking at the technical chart, the stock price has reverted form its lows i.e. AUD
0.35 per share and has crossed the trend line which shows that it is expected to go
up. Looking at the moving average short-term and long-term the short-term moving
average of 10 days has already crossed the long-term moving average giving a
buying signal. The buy signal is also supported by the moving average convergence
and divergence (MACD indicator).

17
Figure-07

18
References:

1) Department, S. M. (n.d.). Myer Holdings Limited Porter Five Forces Analysis,

Porter 5 forces analysis. Retrieved November 4, 2018, from
http://fernfortuniversity.com/term-papers/porter5/asx/1913-myer-holdings-
limited.php
2) Pash, C. (2017, March 01). Australia's department stores are in for another
five years of weak growth. Retrieved November 4, 2018, from
https://www.businessinsider.com.au/australias-department-stores-are-in-for-
another-five-years-of-weak-growth-2017-3
3) Myer. (2018, November 03). Retrieved November 4, 2018, from
https://en.wikipedia.org/wiki/Myer
4) Australia Retail Sales YoY 1983-2018 | Data | Chart | Calendar | Forecast.
(n.d.). Retrieved November 4, 2018, from
https://tradingeconomics.com/australia/retail-sales-annual
5) Myer Holdings Ltd. (n.d.). Retrieved November 4, 2018, from
http://financials.morningstar.com/ratios/r.html?t=MYR®ion=aus&culture=e
n-US
6) Myer Group- Annual Report

19