Warehouse downgraded after 'non-core' Leeming buy

Brokers Forsyth Barr are questioning the strategic rationale of The Warehouse Group's $65 million Noel Leeming purchase and have downgraded the stock.

The NZX50 stock (NZX: WHS) closed up 3.3% yesterday to $3.10, on news of the deal. It started the year at $3, but has gained 24% since late June's price of $2.49.

In a research note issued last night, ForBarr analysts Andy Bowley and Chelsea Leadbetter say the Noel Leeming buy, announced yesterday, diversifies earnings away from The Warehouse's core general merchandise business.

"The move into specialty retailing creates additional risks," the note says.

"WHS has historically had mixed success in the stationery category and performance in Red Sheds has deteriorated for a number of years.

"We are unconvinced that management has the right skills and experience to add significant value to Noel Leeming."

ForBarr downgraded their recommendation from "hold" to "reduce".

Its analysts say the consumer electronics sector is highly competitive, with low margins and rapid price deflation in recent years.

"We question the attractiveness of the acquisition given the unfavourable market dynamics."

ForBarr has lifted its net profit estimates for The Warehouse in the 2013 and 2104 financial year, to $73 million and $77.8 million, respectively.

However, in the absence of "significant synergies" the analysts describe the transaction as "returns dilutive".

Warehouse chief executive Mark Powell says it will fund the acquisition from existing debt facilities.

The consideration of $65 million was for all shares in the Noel Leeming Group and The Warehouse will not assume any of Noel Leeming’s $113 million of bank debt with Bank of Scotland, he says.

The Noel Leeming group was owned by funds controlled by Australian private equity firm Gresham, which led a $138.5 million management buyout from Eric Watson's Pacific Retail Group in 2004.

dwilliams@nbr.co.nz
dbridgement@nbr.co.nz

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