Daily ShareChat: Kathmandu

By Jenny Ruth

Wednesday 6th April 2011

Optimistically, longer-term, Kathmandu Holdings's earnings-per-share could potentially growth 15% compound over the next five years, given network expansion and product innovation, says James Levien, an analyst at Aegis Equities Research, which is owned by Morningstar.

"But key uncertainties include Chinese sourcing costs, competition eroding high margins and the retail environment. If management can continue to deliver results like the first-half of 2011, the stock will be re-rated," Levien says.

Kathmandu reported a 31% rise in net profit to $10.5 million for the six months ended January 31, slightly above the company's January trading update. As a result, Levien has raised his forecast for the full year to $35.5 million from $34.9 million previously.

"The second half usually accounts for approximately 60% of sales and 70% of EBIT (earnings before interest and tax)," he says.

Pleasingly, sales growth of 19% to $127.1 million in the first half was both organic and via store network expansion and refurbishment, Levien says.

Same store sales grew 12%, or 9.5% in constant currency, and that was on top of the 24.9% sales growth achieved in the first half of 2010, he says.

"We do not recommend Kathmandu for conservative investors," he says. Levien puts the stock's fair value at $1.70 and says its earnings risk remains high because the bulk of its sales occur in just two sale events.

Recommendation: Hold.

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