The ASX small-cap share Myer Holdings Ltd (ASX: MYR) could be one of the most underrated businesses around.
Now, I'm not suggesting that hordes of shoppers are about to head into the company's department stores and spend up large. However, there are a few reasons why I think the company's profit can rise from here.
Myer has already delivered impressive returns for shareholders – in the past 12 months, the Myer share price has climbed by close to 100%.
I certainly don't expect a 100% return over the next year, but I do think the ASX small-cap share has a good chance of beating the market. Here's why.
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'Transformative' acquisition
In my view, the announced acquisition of several apparel brands from Premier Investments Limited (ASX: PMV) could be transformative for Myer shares and the overall business.
Myer is buying Just Jeans, Jay Jays, Portmans, Dotti, and Jacqui E to accelerate its key strategic priorities and create a "leading Australian retail platform leveraging respective and complementary strengths" of Myer and the acquired brands.
Assuming the transaction is completed, Myer believes it will deliver "significantly enhanced scale and capabilities to drive growth, operating leverage and greater capacity to invest in growth".
Myer expects the deal to deliver combination benefits of at least $30 million in earnings per year over the short-to-medium term and significantly increase earnings per share (EPS).
These businesses generated $791 million in sales in FY24.
Online sales
Myer sells a wide range of products that its customer base wants. It just needs to connect with them through the right channel.
E-commerce is a great avenue for the ASX small-cap share to pursue growth. In its FY24 result, Myer revealed that its group online sales came to $704.3 million, up 2% year over year. Interestingly, Myer generated 40% more online sales in FY24 than Temple & Webster Group Ltd (ASX: TPW).
However, while Myer has a large and growing online presence, its online sales only accounted for 21.6% of its total sales. There is room for plenty more growth in the adoption of online shopping by new and existing Myer customers. Growth in online sales will allow the business to optimise its store network further and service those e-commerce sales more efficiently.
Pleasing investor metrics
I believe the Myer share price is still undervalued for how much profit it could make in the coming years, if its plans produce economic fruit.
Using the projections on Commsec, the business is trading at 19x FY25's estimated earnings and 15x FY27's estimated earnings. In other words, the business is predicted to grow its earnings per share by close to 25% between FY25 to FY27.
I think those are reasonable valuation numbers, particularly with the Myer dividend expected to jump by 25% between FY25 to FY27 as well.
In my view, Myer shares could perform surprisingly well in the medium term, particularly if the Australian consumer proves to be stronger than the market expects.
