PAS Group Ltd sinks: A buying opportunity?

Fashion retailer, PAS Group Ltd (ASX: PGR) saw its share sink from an issue price of $1.15 to currently trade at 95 cents, since listing on Monday June 16.

According to The Australian and Bloomberg, it was the worst debut for an IPO over $100 million since 2008. Much of the fall could be attributed to weak consumer confidence, and a stream of profit downgrades from retailers in the past few weeks, including Super Retail Group Ltd (ASX: SUL), Pacific Brands Limited (ASX: PBG) and Reject Shop ltd (ASX: TRS).

All four blamed weak consumer confidence for flagging sales, after the Federal government released a range of spending cuts in its budget in May, along with warmer than usual weather playing havoc with winter fashions. PAS Group has 223 retail sites, two main fashion brands Review and Metalicus as well as licencing arrangements with AFL, Mooks, Paul Frank, Fred Bare, Everlast and Slazenger.

If the consumer confidence trend continues, PAS Group may well be unable to meet its prospectus forecasts of like-for like sales growth of 4.2% in the 2014 financial year, and 3.8% growth in 2015. And that throws its forecasts for net profit after tax of $16.6 million in 2014 and $17.7 million in 2015 out the window.

At current prices, that would place PAS Group on earnings multiples of 7.9 for 2014 and 7.4 for 2015. Add in a minimum annualised dividend yield of 8.9% (fully franked) this financial year, and 9.5% next year (again, based on current price) and PAS Group looks extremely cheap. But, and it’s a big but, that’s only if the company meets its prospectus forecasts, which now seems unlikely if the retailer has suffered as much as other comparable retailers.

Consumer confidence tends to be a cyclical economic factor, which means that at some stage, things will improve, and as consumers become more confident in the economy, they will start spending again. On the other hand, it’s hard to know how long or how low consumer’s confidence can fall.

For long term investors, PAS Group and other retailers may well be an opportunity now, although there could be some large bumps along the way.

For another opportunity it's hard to go past a grossed-up yield of 7%... plus double-digit profit growth!

NEWLY UPDATED. The Motley Fool's top dividend stock for 2014 offers growing sales, accelerating profits and a grossed up dividend yield of 7%! Find out the name and code right now -- your copy of "The Motley Fool's Top Dividend Stock for 2014" is FREE. Simply click here!

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.