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Choose Muji Ahead of Uniqlo in Post-Covid World, Jefferies Says

Choose Muji Ahead of Uniqlo in Post-Covid World, Jefferies Says

(Bloomberg) -- As Japanese investors cautiously venture outside into the world post-state of emergency, the operator behind the minimalist Muji furniture stores may be in the best position to capitalize.

That’s according to a note by Jefferies Japan analyst Michael Jon Allen, who named Ryohin Keikaku Co. as the firm’s top pick of branded retailers.

The Japanese government lifted its nationwide state of emergency order on Monday, as the number of virus cases waned and hospitalized patients fell to about a fifth of the peak. While the fear of future outbreaks remains, investors didn’t let those doubts keep them away from the markets, with both the Topix index and the Nikkei 225 surging on sentiment over the economy reopening.

However, Jefferies warns against the idea of a return to normal within months, using an epidemiological model which predicts multiple waves of the coronavirus in the future. Furthermore, Allen says, Japan is more vulnerable to these waves than most other countries, owing to its high population density and low testing for the virus.

In such a scenario, high-quality consumer cyclicals “bought and sold at opportune prices” are likely to be important contributors to performance, the report says, with Ryohin Keikaku undervalued and with room to boost multiples.

“We are convinced that Ryohin will emerge from the current crisis stronger than ever,” Allen wrote, noting it trades at a 35% discount to furniture retailing Nitori Holdings Co. and a 60% discount to Uniqlo operator Fast Retailing Co. The market has taken the recovery of these two rivals “for granted while underestimating Ryohin’s potential,” Allen said.

Choose Muji Ahead of Uniqlo in Post-Covid World, Jefferies Says

Ryohin Keikaku is the only stock that meets a set of criteria Allen lays out to get a buy rating:

  • Low market share, with room to grow even if the overall market shrinks: only Ryohin has “clear and meaningful” room to expand in Japan
  • The ability to lower prices without seeing its margins fall: Ryohin can cut prices to boost the volume of an item by three to four times
  • Room for a multiple expansion: it’s “far more likely” that Ryohin Keikaku’s forward 12-month P/E ratio of around 17x increases to 21x than for similar improvements in Fast Retailing or Nitori’s multiples, he says

Jefferies rates Nitori hold, Fast Retailing underperform and Ryohin Keikaku buy.

By contrast, Fast Retailing “could have the furthest to fall” if a second wave outbreak of the coronavirus happens anywhere with its high seasonality leaving it “accident-prone,” the report says. While Nitori has outperformed during the pandemic, Jefferies says that “initial strength will prove unsustainable.”

Shares in all three of the companies plunged along with the broader market in the midst of the pandemic, with Ryohin Keikaku falling more than 60% between early January and mid-March when the outbreak began to worsen in Japan. Like many other companies, Ryohin Keikaku declined to give full-year forecasts, and saw its April same-store sales plunge by more than 50%.

In a separate report Tuesday, SMBC Nikko Securities Inc. analyst Kuni Kanamori raised her rating on Nitori to outperform and lifted the price target to 20,000 yen from 17,000 yen. While remote-working demand for desks and chairs may now have run its course, she wrote, “moving demand could now pick up as the pandemic delayed relocation plans.”

©2020 Bloomberg L.P.