Buying furniture sellers

Johannesburg - Investors banking on another interest rate cut may regard listed furniture retailers as an opportunity.
 
However, some retailers already seem to have this opportunity priced in. JD Group [JSE:JDG] trades on a historic price to earnings (PE) multiple of 20 times earnings. The PE multiple for Lewis Group [JSE:LEW] is nine times, that of Steinhoff International Holdings [JSE:SHF] 7.3 times, while Ellerines - through its African Bank Investments [JSE:ABL] listing - trades at around 13 times earnings.
 
Furniture retailers had to work hard to tidy up their credit operations.
 
Bad or doubtful debts at Lewis made up about 17% of its credit book at the end of its previous financial year - above the 15.4% target the group had provisioned.

JD Group reported about R472m in bad debts for the six months to end-February, while Steinhoff saw its debtors' book increase from about R129m in 2008 to R932m last year.

Abil has issued a trading statement saying it sees a turnaround at Ellerines.

Credit Suisse Standard Securities said its preferred entrant in the sector was JD Group, for which it has issued an "outperform" recommendation with a 12-month price target of 5 780c, a 38% premium to 4 190c where it is trading at the moment.
 
"While it has greater forecasting risk, we think it is doing more to position itself for long-term sustainability within the industry," Credit Suisse said, referring to the restructuring of JD's financial services offering and the rollout of new products.
 
However, this view is not shared by stockbrokerage Barnard Jacobs Mellet (BJM). "We would continue to avoid JD Group and prefer Lewis, which is part of our high dividend yield portfolio and is trading at an attractive forward dividend yield of 5.4%." BJM said that while JD Group had seen an improvement in its debtors' book, it was "not as material as expected".
 
Stockbrokerage Imara SP Reid is also upbeat about the prospects for Lewis, issuing an "add" recommendation in May when the stock was trading at 6 000c.
 
Imara analyst Warwick Lucas advised clients that while earnings forecasts for Lewis had slipped, "all the signs are for recovery in consumer cyclicals". He pointed to a rebound in vehicle sales as a sign that South African consumers are finding space to breath again.

Regarding Abil and Ellerines, Imara said it recommended the stock as a "buy", but was keeping a close eye on Europe for signs that the global economy could be deteriorating.
 
A black cloud hanging over the sector is continued weak economic data, including news that another 79 000 jobs were shed in the first quarter of 2010 and the number of liquidations grew by 35.7% in May, year-on-year.
 
This has prompted analysts to forecast another 50 basis-point cut in July 2010, especially with concerns about European debt levels and austerity measures.
 
"The latest liquidations data showed some improvement compared to last year, but overall businesses are still finding conditions challenging," said Investec's economic unit. "This indicates that more jobs could have been lost in the second quarter of 2010."
 
 - Fin24.com