MENU

This retail stock is sitting on a 9% yield in FY19 even as it goes ex-growth

Do shares in Reject Shop Ltd (ASX: TRS) belong in the bargain bin or the trash bin? It feels like the latter after the discount variety chain missed earnings expectations and confirmed it’s gone ex-growth.

But there’s certainly a valuation argument going for the stock as well after it crashed 3.5% this morning to $5.60 on its profit announcement even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed 0.5%.

Management posted a 34.3% jump in net profit to $16.6 million for the year ended June 30, 2018, as revenue inched up 0.8% to $800.3 million.

Both figures were under consensus with revenue off by around 1.5% while the bottom line was around 4% under.

That doesn’t sound like much and the sell-off is probably overdone given that the stock is trading on pretty low valuations to begin with, but investors are taking the glass half-empty view of the stock with management telling investors to expect no growth this financial year.

The sombre outlook is probably what’s killing the stock today as the market was expecting high-single digit profit growth in FY19 after management posted a stellar first half result back in February this year.

Management has tried to outline some of the growth levers it can pull but it was weak on details and unconvincing.

Even retailers struggling against the online threat like JB Hi-Fi Limited (ASX: JBH) is likely to eke out growth in FY19, so it’s disappointing that the upside from Reject Shop’s turnaround strategy has ended so quickly.

Perhaps management is trying to be conservative. After all, there should be cost savings from its new Asian procurement centre and its efficient Melbourne distribution centre even as it combats the weakening Aussie dollar.

But same store sales seem to be sliding backwards after a nice increase in the first half of FY18 due to weak trading in Western Australia and the ACT. Management will need to do more to stabilise same store sales if it wants to win back supporters.

On the other hand, bargain hunters may be enticed by the stocks strong yield and low price-earnings (P/E) multiple.

Management is paying a final dividend of 11 cents a share, which will take its full year payout to 35 cents a share or up 46% from FY17. This puts its yield at 8.6% and that’s probably sustainable in FY19 given management’s outlook.

You can expect analysts to downgrade their forecasts for Reject Shop but the stock will still probably be trading on a FY19 P/E of 10 times.

That’s low even for a retailer with little or no growth. Even embattled department store Myer Holdings Ltd (ASX: MYR) whose earnings look set to fall over the next year or more is trading on a forward P/E of 12 times.

I think fair value for Reject Shop is closer to $7 a share although I don’t think investors will be rushing to buy the stock in the short-term.

ASX Tech Share – Real Winner from the World Cup

Earlier this year, millions of Australians set alarms and watched the world's biggest sporting event, the World Cup, play out. But did you know there was another Australian representative quietly succeeding as the world watched?

It's the start-up who have positioned themselves as the global leader in sports analytics. Motley Fool's resident tech expert has already upgraded the recommendation of this company's stock to a rating of simply "Buy More".

Click here to access this share. It's completely FREE!

Motley Fool contributor Brendon Lau owns shares of The Reject Shop Limited. The Motley Fool Australia has recommended The Reject Shop Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!