Small Caps | Aug 15 2016
This story features BABY BUNTING GROUP LIMITED. For more info SHARE ANALYSIS: BBN
Baby Bunting impresses brokers with its maiden FY16 results and strong growth path.
-Strong comparables to be cycled in FY17
-Stock considered expensive but offering attractive outlook
-Margins below expectations due to sales mix
By Eva Brocklehurst
Baby goods retailer Baby Bunting ((BBN)) is on the verge of adding further scale to its business, with brokers lauding its attractive growth path. Results for its maiden FY16 report were at the top end of the upgraded guidance issued in February.
Brokers observe the results exhibit strong sales and operating leverage, with sales growth accelerating to 15.7% in the second half and up 12.5% for the year. Consumers are increasingly aware of the brand, with the folding of My Baby Warehouse in the first half contributing to the strong sales and Baby Bunting also investing heavily in IT, personnel and marketing during this period.
Morgans contends the stock is far from cheap, trading on 27 times FY17 forecasts but offers one of the most attractive, long-dated growth profiles in its retail sector coverage.
Baby Bunting is a dominant player in a defensive sector and 45% of its stores are less than three years old, while the competition is struggling. Yet, with less than 10% upside to the price target, raised to $3.14 from $2.86, the broker maintains a Hold rating.
Brokers note five new stores opened in FY16, four the south east Queensland market. Growth in private and exclusive ranges, now 10%, along with increased purchasing scale have offset higher sourcing costs from a weaker Australian dollar.
Macquarie believes the stock has one of the most attractive outlooks versus peers from both a revenue and a growth perspective. Nevertheless, the broker maintains the stock is trading at a substantial premium and can afford no mistakes.
Margins were the one aspect of FY16 which came in below expectations, being flat on the prior year, a result of strength in lower margin products such as prams, car seats and nappies and not something brokers are particularly perturbed about.
The company does forecast like-for-like sales to moderate over the balance of FY17 to mid single digits as stronger comparables are cycled. Guidance is for sales growth of 15-31% in FY17, an extension of the stores target to over 80 and the private label mix to 15% from 10%.
The outlook reinforces Morgan Stanley’s view regarding the long-term opportunity. The broker expects like-for-like sales growth of 6% in FY17 and a 40 basis point expansion in margins off the elevated metrics achieved in FY16. Hence, estimates are upgraded by 7.2% and 8.9% for FY17 and FY18 respectively.
This broker, too, finds the track record and strong balance sheet highly attractive and increases its target by 20% to $3.30. The main risks envisaged are pressure on margins from Australian dollar depreciation, increased competition from online competitors, and softer consumer spending.
There are two Buy ratings and one Hold on FNArena’s database. The consensus target is $3.21, suggesting 5.0% upside to the last share price and compares with $2.78 ahead of the results. Targets range from $3.14 (Morgans) to $3.30 (Morgan Stanley).
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