ASX Small Cap Favourites: Myer Holdings Limited
We had a good look at the Myer results last week and our initial impressions are still very cautious. While the market is starting to get excited about retail stocks – given the low interest rate environment – it’s important to always remember that retail stocks should be valued on one key metric – free cashflow. Retailers often go out and take on huge contingent liabilities in the form of leases. Stores must be upgraded on an ongoing basis to ensure the remain competitive. So earnings is probably one of the worst metrics to value a retailer’s.
Free cashflow is the net amount after taking all the operating profits and deducting the amount needed to invest in inventory changes and capital expenditure. For an online business, capital investment is limited. Digital products have minimal inventory attribution. That is why businesses like Seek and Carsales have done so well – the amount of earnings the generate is usually very similar to free cashflow. But for traditional retailers, the opposite is true.
So while the market was having a song and dance about Myer’s profit not being as bad, we note that capital investment was very minimal this year and will have to start rising in coming years. Debt levels are down thanks to a dilutive capital raising. That buys some time, but don’t expect solid returns on invested capital in the next few years. The challenges have just been pushed out and we know that with Myer, the real strategic direction of the department store concept model has still not been adequately direct. One to avoid.
Invast is very well placed to bring you some huge opportunities in the coming months. Execution costs for ASX stocks are 0.06% (6 basis points) above minimum charge, which means for a trade with a notional exposure of AUD 10,000, the applicable commission is only AUD 6.00.
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Chief Market Analyst
Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia. The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.
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