Australia | Feb 09 2016
This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH
-Sales flow likely from Dick Smith
-Software diminishes in importance
-Some concerns over Home format
By Eva Brocklehurst
Retailer JB Hi-Fi ((JBH)) has momentum and a firm platform for growth, with a key supportive factor, most brokers agree, being the decline of electronics competitor, Dick Smith ((DSH)), under administration. At the very least Dick Smith is likely to close stores and there is a high probability it will fold altogether.
JB Hi-Fi was reluctant to emphasise any benefit that may accrue as the result of Dick Smith folding but CLSA, not one of the eight brokers monitored daily on the FNArena database, estimates that up to $300m of Dick Smith's $1bn in sales could flow to its rival. The reality is that the benefits of industry consolidation and the removal of a large price discounter should drive strong top line growth and margin expansion for JB Hi-Fi.
Hence the broker believes the company's $143-147m profit guidance is conservative, forecasting 10% or more in earnings growth over the next three years. CLSA has a Buy rating and raises its target to $28 from $25.
UBS welcomes the top line momentum, driven by telco, fitness, accessories, computers and appliances, as it shows JB Hi-Fi is successfully weaning itself off software sales. Nine more stores were converted to the Home format in the half, taking the total to 56 out of a target of 75. UBS upgrades estimates by 1-6% over FY16-18 and believes the risks are to the upside from industry consolidation and a more rational competitive background.
The narrowing margin in the half-year results, due to higher costs, niggled Citi but the prospect that Dick Smith will close 100 stores and JB Hi-Fi will be the main beneficiary is a supportive factor going forward. Deutsche Bank also cited the higher costs but is comfortable in the fact that management took advantage of robust demand to invest in sales & marketing and will be able to control costs when sales slow.
The stock has outperformed some 30% since December and Deutsche Bank believes the upside is fully priced, particularly as the business has already made market share gains and deals on excess stock from suppliers. This now forms a base. Hence, Deutsche Bank retains a Hold rating.
Ord Minnett is not worried about the margin outlook, despite the increased costs, noting the company has a good track record in cost control and there is scope for medium-term expansion as the Home investment phase comes to an end.
The broker is more confident that sales growth can be sustained and the company is able to cycle demanding comparable periods, upgrading to Accumulate from Hold. Ord Minnett also suspects that the entry of Dick Smith into voluntary administration and an expected reduction of stores, if not complete closure, presents a pool of incremental sales for JB Hi-Fi.
One aspect that concerns Morgan Stanley is the reduction in the gap between like-for-like and total sales growth. The broker's analysis shows that the Home division space is less than half as productive as the existing consumer electronics space, which drives sales per square metre lower. It suggests, allowing for online sales growth, that this key metric for retailers may have been negative in JB Hi-Fi's case during the first half.
Given costs are usually linked to the growth in a selling area, preserving margins while sales per square metre are flat or declining, becomes increasingly difficult, in the broker's view. Morgan Stanley observes similar trends occurred in Woolworths ((WOW)) two years ago.
The balance sheet is improving and that warrants the prospect of capital management, in Credit Suisse's view. Net debt is forecast to fall to $39m by FY17. The broker has not included capital management in its forecasts but estimates a $100m buy-back at $25/share could add 2.0% to earnings per share in FY17.
Credit Suisse did not particularly like the lack of clarity on the performance of the Home format and remains puzzled by some of the locations. The broker believes there is greater risk of Home underperforming than the core format and does not include any material profit in its forecasts from that segment.
The New Zealand business is also considered a long way short of being sustainable but remains a small operation. The company is continuing to build scale in that market and, in this region, the closure of Dick Smith would benefit JB Hi-Fi, the broker contends.
Macquarie observes the company executed well on its promotional strategies and ensured a good depth of inventory ahead of the festive season. The broker suspects the balance sheet position is likely to come into increasing focus with the demise of Dick Smith.
This is because retailer cash flows and debt balances are likely to be under the microscope from investors, suppliers and creditors. Macquarie expects JB Hi-Fi to be net cash by FY18, which should provide both internal and external investment opportunities.
FNArena's database shows four Buy and four Hold ratings. The consensus target is $23.12, suggesting 3.2% upside to the last share price. This compares with $21.46 ahead of the results. The dividend yield on FY16 estimates is 4.3% and FY17 is 4.7%.
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