Special situations: Debenhams (DEB LN)
Cheap – but for a reason - pass
DEB LN: 79p
April 8, 2014
There has been press reporting that Sports Direct International (SPD) has sold its 4.6% stake in DEB and also sold a put option agreement covering 6.6% voting rights. Further details on the put option were not disclosed. When SPD acquired its 4.6% stake, it said that it intends to be a “supportive shareholder” and “wishes to explore options at an operational level to work together”. Although, the exact intentions of SPD and its controlling shareholder, Mike Ashley are not known, we note that Mike Ashley has a track record of buying brands at distressed levels. In addition, he had been linked with other retailers (such as Matalan) on JVs/stake acquisition.
On the fundamental side, DEB continues to be a laggard vis-à-vis its peers. DEB is pushing through an aggressive online strategy to counter declining sales at its stores due to structural changes in the sector. Although, this strategy is contributing to the top-line growth, it is coming in at the expense of operating margins. Among its peers, DEB has the lowest operating margins and consensus expects them to decline going further. On the other hand, the consensus expects margins to expand both for Next and MKS. We believe that DEB has a long way to go before it catches up with its competitors, who have more competitive online product offerings and better cost structures.
On relative value grounds, DEB looks fair value/overvalued vs its peers, despite being cheap in absolute terms. On a DCF basis, we value DEB at ~81p a share (~3% premium to current price). Overall, we believe that DEB lacks any immediate catalysts that could positively re-rate the share price in the short-term.
The stock would only become a buy if a case can be made for margin expansion which is the case for now.
FULL REPORT ATTACHED