Australia | Feb 15 2017
Several brokers question whether electronics retailer JB Hi-Fi is too reliant on a smooth integration of The Good Guys in its outlook.
-Near-term outlook supported by strong housing but how long will the tailwind last?
-Closure of Dick Smith provided benefits in the first half which will dissipate
-Positioned well to compete with any potential offshore entrant
By Eva Brocklehurst
Electronics retailer JB Hi-Fi ((JBH)) posted a strong first half result, but several brokers question whether there is too much reliance on the successful integration of The Good Guys and synergy targets in the outlook.
Like-for-like sales rose 9% in the Australian business, supported by market share gains and margin improvement. The Good Guys, in JB Hi-Fi hands since November, delivered sales growth of 1%, a result lauded by brokers given the disruption from the acquisition and transition. The main disappointment was the New Zealand business, although UBS notes the impact was relatively light.
The broker upgrades forecast by 6-9% for FY17-19 to reflect the results and the industry consolidation. A more rational competitive backdrop is expected, given the closure of Masters and Dick Smith. The broker's forecasts are now in line with revised revenue guidance and slightly ahead of the top end of net profit guidance of $200-206m.
Uncertainty Over The Good Guys
The near-term outlook is supported by tailwinds from housing, market consolidation and potential upside to synergy targets from the integration of The Good Guys. UBS believes earnings risk remains to the upside and reiterates a Buy rating. The main risk on the downside is a sharp correction in housing, an aggressive new entrant in the market such as Amazon, or a hiccup in the integration of The Good Guys.
These are the very uncertainties that Credit Suisse highlights. Concerns centre on the extent to which the closure of Dick Smith provided benefits in the first half, the magnitude and potential longevity of the recent housing tailwind and the profitability of The Good Guys on a sustainable basis. The broker suspects it will take some time to become confident in the earnings trajectory for The Good Guys.
FY17 guidance is for $5.58m in sales, with a strong start observed in the second half, as January like-for-like sales are up 7.2% for JB Hi-Fi and up 3.5% for The Good Guys. Morgans is unconcerned about the integration of The Good Guys, or that like-for-like sales growth may moderate as the demise of Dick Smith is cycled.
Ord Minnett, too, has few qualms. The broker cites upgraded sales guidance and upside risks to FY17 net profit guidance. The acquisition of The Good Guys provides valuation support for the stock and earnings growth is forecast to be strong in the medium term as synergies are realised. Despite execution risks, especially with a significant number of joint-venture partners that are leaving the business, Ord Minnett is confident the transition can be well managed and retains an Accumulate rating.
Morgan Stanley is not so sure that the numbers for The Good Guys add up. Analysis of the metrics on a per-day basis shows costs have likely been pulled forward. JB Hi-Fi has indicated no synergies were booked during the period of ownership and the broker believes this will be an issue in 12-18 months time when this period is lapped.
Valuation Considered Full
The company's sales guidance implies that comparable store sales growth slows to 5.5% on average in the second half and Credit Suisse moderates its growth estimates further, to 2.6% and 2.0% for FY18 and FY19 respectively. Given recent share price appreciation, the broker downgrades to Underperform from Neutral.
Morgans believes the company's low-cost model and the increased power of the combined group positions it well to compete domestically against any potential offshore entrant. Hence, the broker finds nothing to fault in the stock's performance and downgrades to Hold from Add simply on valuation.
Citi suspects growth will be challenging to match in the second half and FY18, as the benefit from Dick Smith fades. The broker suspects the first half was the likely peak in like-for-like sales growth and believes this rate will halve for JB Hi-Fi Australia in the second half, to around 4.4% on its calculations.
The broker also expects the uplift in gross margins will not be repeated in the second half. The lift in gross margin was the largest first half increase since the first half of FY11 and gross margin stands at the highest level since the first half of FY06.
Morgan Stanley is another that believes the stock's valuation is full as margins are approaching the peak of the cycle. The broker compares JB Hi-Fi's operations with world class retailers and believes it will take a long time for this business to be usurped. There is little concern, therefore, about any entry by Amazon into Australia, although the broker acknowledges consumer electronics changes can happen quickly.
Macquarie expects The Good Guys should begin to contribute to the longer term earnings outlook from mid-year and forecasts JB Hi-Fi to deliver three-year compound growth in earnings per share of 11.8% to FY19. Evidence of strong ongoing sales growth has partially dampened concerns about the sustainability of growth as the benefits from Dick Smith are cycled, although the broker accepts this will not be confirmed until the fourth quarter of FY17.
Moreover, comparable store sales growth and growth in January suggest additional sources of growth are there beyond the closure of a competitor. Online sales continue to experience strong growth in the first half, up 40.4% and now represent 3.8% of total sales for JB Hi-Fi Australia. This is up from 3.0% in the first half, Macquarie observes.
FNArena's database shows three Buy ratings, four Hold and one Sell (Credit Suisse). For consensus target is $30.76, suggesting 7.1% upside to the last share price. Targets range from $26.49 (Credit Suisse) to $32.80 (Macquarie). Week what The dividend yield on FY17 and FY18 forecasts is 4.1% and 4.6% respectively.
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