TSX Commentary

RONA Inc. (RON) – $16.62 – Outlines Its “New World” – Review of 2010/2011 Strategic Plan; Outlook Unchanged
Sector Perform, Average Risk, Price Target: $17.00
RONA hosted a well-attended investor day in Toronto yesterday and provided details around Phase 2 of its 2008-2011 strategic plan. As we move into 2010/2011, RONA is focused on accelerating growth, although given the economic backdrop RBC CM expects growth to be back-end loaded. Management has set a target of increasing market share from its current estimated
17.5% to 20% over the 2010-2011 period, which implies over 100 bps of annual market share growth. Growth should come from a combination of improving sales from the existing network, along with modest new store additions, but the key element is likely consolidation of the 55% of the market that still lies with independents and private chains. While the step-up in dealer recruitment activities is anticipated to drive better return on capital employed, it is also likely to put downward pressure on consolidated profitability due to more rapid growth in profitability from the distribution function. But the impact of lower margin growth assumptions is offset by lower capex and D&A. RONA is currently trading at 13.5x RBC CM’s 2010 EPS forecast of $1.23, essentially consistent with the long-term 20% relative valuation discount to the average of LOW and HD. At this time, RBC CM is maintaining its 13x P/E multiple on RONA, in line with the current trading multiple but below the normalized range due to lack of visibility in forecasts related to uncertainty over the pace of the economic recovery. Applying this multiple to RBC CM’s mid-2011 EPS estimate of $1.29 generates a price target of $17 (unchanged). RBC CM maintains its Sector Perform, Average Risk rating.