Interactive Investor

Can SuperGroup break out to all-time high?

3rd July 2017 13:27

David Brenchley from interactive investor

SuperGroup was forced last Thursday to give away its important numbers early, due to the theft of a draft copy of its final results. They were in line with expectations, yet shares in the owner of the Superdry clothing brand still fell. Now, with the full results presentation available, investors bought back in with gusto Monday.

Swatting aside weak retail sales data that's hit the sector in recent weeks - 72% of total sales volume is generated overseas - SuperGroup shares surged as much as 7% to over £16 for the first time in a fortnight.

Headline numbers were already known, of course: revenue of £752 million in the year ended 29 April 2017 was up 27%, with underlying pre-tax profit up 18% at £87 million. Underlying earnings per share (EPS) soared 17% to 84.5p.

Bricks and mortar sellers have struggled in the US, but SuperGroup hs managed to break even in its second year in North America, opening seven new stores there. That was on-plan, as is its joint venture in China, where it opened five owned and three franchise stores in the period for a loss of £2.6 million.

A full-year dividend of 28p per share was an increase of a fifth and, with a healthy net cash position of £65.4 million, the payout, representing a yield of 1.8%, is covered three times by earnings.

While Superdry remains a go-to fashion brand across generations, the company plans to broaden its appeal further by launching Superdry Sport "shop-in-shops" within some of its larger stores. It's also building its fast-growing womenswear business to compare with the larger menswear division.

Chief executive Euan Sutherland was upbeat in his assessment, noting investment in infrastructure is underpinning global growth plans, while new products and social and digital campaigns are winning over new customers.

Still, despite the shares racing higher, it seems 1,600p is a step too far. Apart from the odd foray outside the range, they've traded between 1,430p and 1,630p for the past year.

Significant momentum built toward the end of last year spilled over into 2017, rising almost 40% from its October low to a six-year high at 1,791p early January.

With management expecting full-year 2018 results will meet forecasts, broker Investec upgrades pre-tax profit forecasts by up to 5%.

A reduction in stock levels is expected to deliver a 90 basis-point erosion on the gross margin for 2018, but analyst Kate Calvert expects this to reverse over the following two years and will drive an acceleration in growth rates.

While the current dividend is modest, there is scope for special dividends adding a further attraction to the investment case. Forecast dividend per share of 43.3p in 2020 on Investec's forecasts is more than double this year's offering, giving it a prospective yield of 2.8%.

Both Calvert and Cantor Fitzgerald analyst Mark Photiades reckon a calendar year 2017 price/earnings (PE) ratio of 16.5 times, falling to 14.5 times next year is undemanding.

Because of her upgrade to earnings estimates and rolling forward the valuation to 2018, Calvert ups her price target 9% to 2,060p from 1,890p. An undervalued roll-out story, she says. Buy. Photiades sticks at 1,920p.

While the pair have 'buy' recommendations on the stock, Liberum Capital is more cautious with a 'hold' rating and 1,750p target, preferring Ted Baker, which trades on a PE of 18.6 times, significantly lower than its long-term average, and is set to deliver 13% EPS growth this financial year.

Underperformance of the FTSE All-Share year-to-date will naturally disappoint investors, but over longer timeframes SuperGroup has smashed the wider market. Seems it needs a more significant catalyst to convince investors. Maybe watch out for an update on first-half trading in early November.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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    UK shares
    Consumer goods and services
    Infrastructure