Buying ASX 200 stocks when they are undervalued is a great way to generate big returns.
However, knowing whether something is cheap or simply a value trap can be difficult.
The good news is that analysts at Bell Potter have been doing the hard work for you and believe that big returns could be on the cards for buyers of undervalued Premier Investments Limited (ASX: PMV) shares.
Image source: Getty Images
What is the broker saying about this ASX 200 stock?
Bell Potter is feeling very positive about the retail giant's proposed demerger of its Peter Alexander and Smiggle brands and its potential merger with Myer Holdings Ltd (ASX: MYR). In respect to the latter, it commented:
Premier Investments (PMV) recently announced the proposal received from Myer Holdings (MYR) to divest PMV's non-core Apparel Brands (AB) to MYR via an all-script sale. We consider few scenarios on how the move could provide revenue/margin/cost savings outcomes for the combined group if the potential merger between Myer and AB succeeds. We see various opportunities for revenue/earnings incrementality up to $3/share within our current PMV valuation.
While MYR shareholders could benefit from an EPS accretion, we see upside to PMV shareholders given the ~64% post-merger ownership in MYR's upsized earnings base from a previous 31%. While the higher earnings base yielding higher operating margins (BPe ~9% vs MYR's current 6%) warrants a re-rate, this could see unlocking of significant value in post-merger MYR shares that PMV shareholders will own via the distribution of shares from PMV.
The broker has also spoken positively about the ASX 200 stock's proposed demerger of the Peter Alexander and Smiggle brands and feels it makes its shares undervalued on current multiples. It adds:
We view PMV's P/E multiple of ~15x (FY25e, BPe) as attractive, considering the value that we see emerging from the potential demerger of PMV's two key brands, Smiggle and Peter Alexander which are global roll-out worthy somewhat similar to some of the dominant players such as LOV and LULU, highly profitable in comparison to the peer group (EBIT margins wise). With the Smiggle spin-off due in Jan-25, we await updates on the leadership transition. PMV remains a key preference for us within the Consumer Discretionary sector.
Big returns
Bell Potter has a buy rating and $35.00 price target on the ASX 200 stock. Based on its current share price of $29.83, this implies potential upside of 17% for investors over the next 12 months.
In addition, the broker is forecasting 4%+ dividend yields each year through to at least FY 2026. This boosts the total potential return to approximately 21%.
