Morgan Stanley says there's 35% upside to Premier Investments

Morgan Stanley says there's meaningful upside potential in separating Premier Investments' (ASX: PMV) pyjama retailer, Peter Alexander and children's stationery brand, Smiggle.

The analysts reaffirmed a $39.50 target price on Tuesday and addressed five key investor pushbacks against Peter Alexander and their bullish call.

Premier Investments has been one of the best performing retail stocks, up 5.7% year-to-date and up 39% in the past 12 months. This performance has been underpinned by Peter Alexander, which Morgan Stanley considers Australia's fastest-growing retailer over the past five years. Peter Alexander has achieved a compound annual growth rate of 27% in earnings from FY19 to FY24, nearly three times the peer average of 10%.

Addressing Key Pushbacks

1. Break-up dis-synergies: Acquisitions often bring synergies, but the opposite can occur with business spin-offs. Morgan Stanley says dis-synergies are difficult to quantify but currently include $35 million of reinvestment for operations, IT, finance etc. "Premier has suggested potential dis-synergies are immaterial. This is supported by progression on the de-merger (why would major shareholder and Chairman, Solomon Lew break-up Premier if it didn't create value?)," the report said.

2. Peter Alexander (PA) UK expansion: Analysts believe PA's expansion into the UK will likely be unsuccessful due to the highly competitive nature of the apparel market. "Our view is the UK nightwear market is highly fragmented with no category killer ...This suggests there is room for a brand with a differentiated and fashion-focused product, like PA, to disrupt the market."

Source: Morgan Stanley

3. ANZ growth runway: PA's ANZ growth profile is widely expected to slow over the medium-term (to 7% pa over FY23-26) "However, PA has a strong record of beating consensus expectations," the analysts said. They see upside to consensus from new stores (an opportunity of 180-200 stores from 127 at FY23), larger format stores and market share gains.

4. Smiggle Managing Director transition: Smiggle's Managing Director, John Cheston, is set to join Lovisa as CEO in June 2025. Morgan Stanley views this as an incremental negative but not a game changer as the business has been an under-performer over the past five years. The search for a new managing director could delay its potential demerger.

5. What's priced in: "We don't think the upside from a potential demerger is priced in," the report said. We'll take a deeper dive into the sum of all parts below.

What are the businesses worth

Morgan Stanley says the market is currently valuing Peter Alexander at a price-to-earnings of 18-20, based on discussions with investors over the past 6-12 months. They believe the market is likely to undervalue the business due to limited financial disclosures at the brand level, such as comps growth, gross margins and capex.

Based on FY25 forecasts, the market is currently valuing the company at:

Whereas Morgan Stanley's base case bumps up the metrics to:

Both models assign $1.4 billion or $8.94 per share to the company's investments in Breville, Myer, property and net cash.

Is Peter Alexander really worth 25x?

The big debate is whether or not Peter Alexander can garner a price-to-earnings multiple of 25. Morgan Stanley's bullish thesis rests on two key catalysts:

1. Further disclosures on Peter Alexander could change the market's perception of its earnings growth trajectory

2. Peter Alexander has a strong track record of beating consensus expectations. This could see scope for it to deliver 10-15% earnings growth over the medium term (vs. consensus expectations of 7%)

On the flip side, Lovisa (ASX: LOV) trades at a forward (FY25) price-to-earnings of 30.2. The company is expected to grow its earnings by 30% in FY25 and 22.9% in FY26.