##{"id":59225,"date":"2011-11-29T09:48:53","date_gmt":"2011-11-28T22:48:53","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/11\/29\/citi-not-joining-the-crowd-on-orotongroup\/"},"modified":"2011-11-29T09:48:53","modified_gmt":"2011-11-28T22:48:53","slug":"citi-not-joining-the-crowd-on-orotongroup","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/11\/29\/citi-not-joining-the-crowd-on-orotongroup\/","title":{"rendered":"Citi Not Joining The Crowd On OrotonGroup"},"content":{"rendered":"

\n\t– Citi<\/span> initiates on Oroton<\/span> With Neutral rating
\n\t– Stockbroker sees stock as fair value at present
\n\t– Asia offers upside potential but some time away
\n\t– Only non-Buy recommendation in FNArena<\/span> database<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tPrior to today, luxury goods retailer OrotonGroup<\/span> ((ORL<\/span>)) was rated as a Buy by all four brokers in the FNArena<\/span> database to cover the stock. All were attracted to a combination of a strong balance sheet, the potential for Asian expansion to boost group earnings and a solid on-line product offering that put the stock among the top of the retail offerings.<\/p>\n

\n\tCiti<\/span> has initiated coverage with a slightly less positive view, rating Oroton<\/span> as Neutral with a price target of $8.30. This brings the consensus price target for Oroton<\/span> according to the database to $8.91, down from $9.07 previously.<\/p>\n

\n\tCiti's<\/span> Neutral rating is despite a solid earnings growth outlook, the broker forecasting earnings per share (EPS) growth for Oroton<\/span> of 11% in FY12<\/span> and 7% in FY13<\/span>. Citi's<\/span> EPS forecasts stand at 67.4c<\/span> and 72.1c<\/span> respectively, which compares to consensus EPS estimates of 66.5c<\/span> for FY12<\/span> and 73.5c<\/span> for FY13<\/span>.<\/p>\n

\n\tLonger-term, Citi<\/span> expects Oroton<\/span> can deliver 44% sales growth over the next five years. Almost half of this is expected to come from the introduction of more fashion products at higher price points. <\/p>\n

\n\tCiti<\/span> has confidence in these expectations given competing products are even more expensive than those offered by Oroton<\/span>. There is a potential risk to Citi's<\/span> sales growth estimates from global luxury brands harmonising<\/span> prices, as this would reduce the premium paid at present by Australian shoppers.<\/p>\n

\n\tAnother risk is to the margin outlook, as Citi<\/span> expects the Asian expansion will put some pressure on current margins given increased promotional activity. Adverse exchange rate movements may also see margins come under pressure.<\/p>\n

\n\tAt present Oroton<\/span> is the exclusive distributor of Polo Ralph Lauren in Australia and New Zealand, but Citi<\/span> doesn't see this remaining the case indefinitely. As the broker notes, the licence<\/span> is likely to be transitioned back into a wholly-owned operation sometime in the next 10 years.<\/p>\n

\n\tSimilar distributorships in the Asian and Pacific regions have already been acquired, making such a move more likely. Citi<\/span> points out Oroton<\/span> would receive a payout if such a change was made, but any sale would likely still be value dilutive.<\/p>\n

\n\tWith respect to Asia, Citi<\/span> agrees the market offers a highly lucrative opportunity for Oroton<\/span> but expects any success in the region will take some time to develop. On Citi's<\/span> numbers Oroton<\/span> is only likely to break-even in Asia in FY14<\/span> and will only have 30 stores by FY15<\/span>. Citi<\/span> estimates each 10 stores above this level adds $0.58 to its valuation for Oroton<\/span>.<\/p>\n

\n\tThis view on Asia forms the basis for Citi's<\/span> Neutral rating. Given no upside from the region is expected to materialise<\/span> over the next 12 months, the stockbroker argues Oroton<\/span> shares looks fully valued on a FY12<\/span> earnings multiple of 11.8 times. <\/p>\n

\n\tAs a result, Citi<\/span> expects the Oroton<\/span> share price will range trade between its PE relative valuation of $7.33 and a sum-of-the-parts valuation of $8.49 over the coming year. This $8.49 sum-of-the-parts valuation of Citi<\/span> is below all other price targets for Oroton<\/span>, the lowest of which is Credit Suisse at $8.60. Targets range as high as BA-Merrill Lynch at $10.09.<\/p>\n

\n\tThe trading range over the past year for Oroton<\/span> shares has been $5.95 to $9.50 and the current share price implies upside of a little over 10% to the consensus price target in the FNArena<\/span> database.<\/p>\n

\n\t <\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"