As markets continue to slip, one of the day's risers is Sports Direct International.
Mike Ashley's retail empire has seen its shares climb 7.5p to 776.5p after analysts at Exane BNP Paribas began coverage of the business with an outperform rating and a £10 price target. Exane pointed to Sports Direct's international ambitions as well as its growth prospects in the UK. Analyst Jonathan Beake said:
Sports Direct are embarking on an aggressive yet low-risk European growth agenda. Through store and online expansion we expect International revenue growth of 26% compound annual growth rate over the next 4 years, moving from 23% of group revenues in 2013 to 40% in 2018. Transitioning from a successful UK retailer to a European growth story can have a meaningful impact on forecasts, sentiment and valuation. ASOS and Primark are prime examples.
This is not just about International growth. Sports Direct is dominant in the UK, with one of the best real estate portfolio's in the listed universe, sector-leading momentum and profitable growth from online. The UK business alone can justify the current valuation of the group. In four years we expect earnings per share to nearly double. Sports Direct is our top pick in European retail.
In more detail, Exane said there were three key components to future growth:
1) Aggressive expansion of the international store business – Through an aggressive acquisition strategy, Sports Direct aims to have a significant presence in all major European markets within 5 years. There is healthy pipeline of targets and a joint venture- then-takeout approach reduces risk whilst maximising local expertise. The proposition looks attractive, sharp pricing resonates across consumers, the product has global appeal, early signs are encouraging and we see no peers of comparable size or quality.
2) Profitable growth of international online – Despite minimal marketing, 70% of website traffic comes from outside the UK. This demonstrates the international appeal of the proposition, but also offers a growth angle in its own right. Sportsdirect.com shares a number of characteristics with ASOS. It is too early to consider, or value the business in this way, but the similarities are noteworthy and offer a free option. 3) Domestic dominance – Dominant market share. The most flexible real estate portfolio amongst listed peers. Sector-leading momentum. Profitable and well managed online growth. Sports Direct's UK business offers continued growth from a solid base.
And it points to one possible reason for the company's lower rating than some of its peers:
No report on Sports Direct is complete without mentioning its founder and majority shareholder Mike Ashley. Part of the valuation discount likely reflects the challenging relationship between himself and the investment community. Whilst his strategic vision and successful execution has been the key driver of success, his tendency to make unexpected strategic decisions can weigh on investor enthusiasm. Over time, we believe this discount will diminish, as the market comes to appreciate consistent delivery and the extensive international opportunity.
