Solid growth at a discount valuation

The 1H17 result from Michael Hill International (MHJ) result beat our EBIT forecast by c3%. A lower like-for-like sales outcome was offset by stronger-than-expected margins resulting from strong cost control and a reasonable Christmas trading period (a significant contributor of full year earnings).

This solid result leaves MHJ well placed to achieve our FY17 earnings forecast (1H EBIT contributed c77% of our FY forecast). Management remains comfortable with FY17 consensus EBIT forecasts (A$52-53m; Morgans estimate at A$52m).

It is clear that trading conditions in traditional jewellery markets in Australia and New Zealand are challenging, however the group is managing its costs well which has eased the potential pain of operating deleverage on benign top line growth.

We believe the prize for MHJ remains unchanged – meaningful store and margin expansion as Canada reaches critical mass. The Emma & Roe story continues to be pushed out and will drag on group earnings growth over the next few years. In our view, Pandora has clearly gained extraordinary traction and we continue to believe Emma & Roe has a reasonable change of success in coming years. We continue to remain attracted to MHJ's long-term store rollout growth profile and the resulting margin expansion from scale benefits.

MHJ is trading at a discounted valuation of 15.1x FY17F PE, vs the overall retail sector on 16.7x, and offers solid EPS growth. We maintain our  Add recommendation.

Contributed by Josephine (Jo) Little, Senior Analyst, Consumer Discretionary, Industrials & Developers. Original blog here: (VIEW LINK)