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Latest from Aspect Huntley: they seem to rate the Lazard holding a positive factor also



Specialty Fashion Group Limited (SFH)


The going gets tough


Recommendation 27/05/2008: Buy

Investment Rating

SFH (formerly Miller's Retail Limited, MRL) operates over 800 stores under six brands: Millers Fashion Club, Katies, Crossroads, Autograph, Big City Chic and Queenspark. Strategic initiatives are still in early days but remain focused on improving the core apparel business. Growth is contingent on margin expansion and finding appropriate bolt on acquisitions. The target demographic of mature women's apparel has proven to be a relatively resilient market. Earnings are leveraged to trends in discretionary spending, recently under pressure from rising interest rates and higher fuel and food costs. Repositioning and restructuring may cause some short term disturbance to existing trading operations. Value investors may brush aside poor history and look toward future potential.





NBLÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s profit downgrade highlights the cut-throat conditions facing retailers over the past six months. SFHÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s share price keeps sliding, now down almost 50% year to date as the likelihood of a downgrade before August grows. We last downgraded our SFH earnings numbers in April, assuming FY08 negative comparable sales of 3% compared to a flat 1H result.





We now take an even more conservative view and revise FY08 comparable sales to negative 6% with a 0.5% drop in gross margins. Assuming a disastrous 2H08 sees our FY08 NPAT and EPS forecasts fall by another 9% to $24.4m and 12.8 cps respectively. FY09 NPAT also falls 8% to $25.6m on EPS of 14.1 cps. WeÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢re lowering our store rollout target from 25 to 20 net new stores annually with underperforming stores closing down, particularly as landlords bump up leases when stores mature.


Any offshore sourcing benefits will be offset by discounting towards year end. How bad can it get? At 90 cents per share the stock trades on a revised FY09 EV/EBITDA multiple of just 3x which seems grossly undervalued.


Long term strategic initiatives, scale, soon to expire adverse hedging positions and ramp up in offshore sourcing have been totally ignored by the market. Lower margin and revenue assumptions see our DCF valuation fall slightly to $1.55, now implying almost 100% upside to current market prices.


We still think SFH will emerge from this downturn in a better condition relative to its competitors, possibly acquiring underperforming chains and bolting them onto the existing portfolio of brands. The balance sheet remains healthy, though the buy-back completely fails to support the share price. Lazard Asset Management increased its substantial shareholding from 10.9% to 12.3% in late April.



Recommendation Impact

(Last Updated: 27/05/2008)

We maintain our Buy recommendation below $1.10 reflecting an FY09 revised PER of 8x and fully franked dividend yield of 10%.





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Gives you a warm feeling to know that the bottom line will benefit by $4m or so a year from now on, with no further effort required. Much better than those economy drives and cost cutting measure most companies regularly promise which always go nowhere and are soon forgotten. :)
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