Initiate coverage on Bata with an ‘overweight’ rating and a P/E based price target of R1,556 per share. Bata trades at a 20% P/E discount to peers, and we believe margin pressures are already priced in. We value Bata at a target multiple of 30x and expect valuations to be aided by improving growth visibility and rising returns. We believe the company offers investors strong exposure to the parent company as well.
Three key steps adopted by Bata to improve its brand positioning and placing it strongly vs peers are: 1) increasing its focus on the outsourcing model in a labour-intensive industry; 2) rationalising the number of employees and opening new format stores (K-stores) and 3) closing down less profitable stores and refurbishing existing ones.
Our 10% realisation growth over CY13-16e is driven by Bata’s focus on premium leather products versus plastic and rubber earlier; in-sourcing of global brands, especially at the premium end, and increases in the retail area per store.
We expect near-term pressures on margins from rising ad spend and rental costs, but this is already built into our 30 bps decline over CY13-15e. However, we expect improving product mix and rising operating leverage to provide a strong structural support in the medium term.
By Barclays