Friday 16th May 2003
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From their high of $3.35 last October the shares have slid inexorably to their recent low of $1.91, a 43% decline, which wiped $88 million off the company's market value.
In the past few days things have picked up slightly but the slide has puzzled market analysts, who see nothing in the company's operating results to justify a derating and some potential positives on the horizon.
One of these is the possibility our biggest appliance retailer could emerge as the proud new owner of the Farmers store chain, which is on the market following a review by its owner, Australia's FAL.
Buying a department store chain, that endangered species of the retail world, might not seem like a particularly bright move and Farmers' light has dimmed considerably from the days when it was one of New Zealand's strongest retail brands.
The review by FAL followed the accession of a new managing director, Trevor Coates, the $690 million acquisition of the Woolworths New Zealand supermarkets and a refocusing on FAL's core food retailing business.
Now shorn of the loss-making Deka stores, and tarted up no doubt with an eye to sale, Farmers turned in a creditable January first-half performance, with strong sales and margin growth.
Having visited a few stores, Shoeshine reckons there is still considerable room for improvement. The whole point of a department store is that you can find pretty much anything in one place but Farmers' stock range is narrow and appears targeted at suburban matrons.
What's more, much of what you can find there will be half the price down the road at the local Warehouse.
How sensible a buy it would be for PRG depends, of course, mainly on the price it would pay. But the synergies must be tempting.
Both companies sell big-ticket household items and operate their own finance companies to give consumers a helping hand. Combining the two would create considerable scale and synergy gains.
This will be apparent to PRG's 73% shareholder Eric Watson, who has long seen opportunities in welding finance companies together, as he has done with Hanover Group.
Having spent $59 million buying lingerie maker Bendon last year, PRG would find it handy to gain some distribution muscle through Farmers' stores.
Farmers also stocks whiteware, brownware, and furniture, as PRG does. Buying the stores would remove a competitor in these categories and the market is so fragmented it's unlikely the Commerce Commission would object.
Whether or not PRG buys Farmers, its operating performance seems sadly overlooked by equity investors.
Last year's record $17.4 million profit was the third straight year of double-digit growth and the September first half of the current year yielded a 14% higher bottom line and 46% growth in earnings before tax and one-offs. Sales revenue was up 27% to $270 million.
PRG has since warned conditions were tough in the early months of the second half. On February 21 it said "difficult trading conditions" during January and February meant it expected only a modest improvement on the 2002 bottom line result.
On March 21 it reiterated the warning, adding only that the tough conditions would "impact on the year-end result." That presumably means the profit will be equal to or below $17.4 million.
Earlier this month JB Were had an optimistic forecast of $17.7 million profit this year and $20 million next.
If JB Were is right, that means double-digit profit growth will resume next year. The broker notes PRG's expansion plans, both by opening new stores and by acquisition, and values the shares at $2.83.
How PRG has done since is anyone's guess as, alone among the listed retailers, it doesn't release quarterly sales and margin reports. Reports of slowing sales growth from the other retailers, and general predictions of a slowing economy in the second half of this year, suggest the company will need to keep careful control over stock levels, costs and margins over the coming months. It has already said it will.
Focusing on such short-term indicators is missing the point. As this newspaper reported in March, PRG sticks out in Stern Stewart's 2002 listed companies wealth creation league table for the inexplicable lack of recognition in its share price for its longer term performance.
It's FGV (future growth value) rating is negative 8%, indicating that, at share price levels far higher then than now, the market thinks the company will actually shrink. That's further evidence, if any is needed, that New Zealand investors pay little attention to companies' actual records in creating or destroying economic value.
Meanwhile, Ericologists are speculating about when Watson will mount his next cleanup bid, and at what price.
His last attempt was a year ago, at $2.25 but it was driven more by the necessity of offering the minorities an exit at the same price as the shareholders he had bought out privately than by any burning desire to gain control of PRG's cashflows.
Only 7% of PRG's shares are "free float" so no interested institution, other than Axa which has an 11% blocking stake, can build up a meaningful holding.
Axa knows what the company's worth and it won't sell out cheap. Over to you, Eric.
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