Treasure Chest | Dec 16 2020
This story features HARVEY NORMAN HOLDINGS LIMITED. For more info SHARE ANALYSIS: HVN
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Is there a persistent change occurring with working from home, and will this benefit JB Hi-Fi?
-Potential for capital management in FY21
-Elevated household goods expenditure could endure
-Buoyant housing market underpins earnings
By Eva Brocklehurst
The sudden need to work from home has shifted market views on the household goods sector, which has profited considerably as people purchased items for their home office and spent more time on the couch.
Is this sustainable? Credit Suisse believes there is a persistent change occurring, as a significant portion of the population will work from home on a regular basis in the future, providing cost savings for both employers and employees.
Credit Suisse upgrades JB Hi-Fi to Outperform from Neutral as a result, noting an almost debt-free balance sheet along with surplus franking credits that signal capital management could be on the cards in FY21.
There remains the potential for negative comparable numbers in the June and September 2021 quarters and the broker acknowledges cycling a more than 30% growth rate is quite an obstacle.
Yet Credit Suisse believes the market is not factoring in the extent to which the step-change in consumer habits is likely to be enduring, calculating, on the basis of 30% of the Australian workforce working from home two days per week, there is a 0.04% direct and 0.03% indirect benefit for furniture and electrical retailers.
Morgans believes Christmas will be a "boomer", although suspects the market will attempt to look through the strength and try to ascertain what is likely to be enduring. The main enduring benefit of the pandemic stems from the repair to balance sheets, the broker asserts.
Morgans notes a re-rating in the share price since February for JB Hi-Fi has been outpaced by the extent of the company's earnings upgrades and these two cancel each other out, resulting in a Hold rating.
Citi suspects the gradual recovery in international travel expenditure will mean the household goods sector slowly runs out of steam. The pace of that recovery is also likely be dependent on a widely-available vaccine, in order to drive a return to pre-pandemic levels.
That said, household goods expenditure may moderate but should remain elevated relative to pre-pandemic levels, and the broker also recognises an element of structural change, given the technological solutions that enable working from home over the longer term.
Macquarie is not convinced and expects a return to normality will mean discretionary expenditure reverts to services and away from consumer durables. In its favour, JB Hi-Fi has strong new products in the form of 5G-enabled phones that could draw customers at Christmas.
Subsequently, given a vaccine is on the cards in 2021 the broker suggests the appetite for consumer electronics over the next two years will subside and travel and services return to feature prominently.
Citi anticipates the elevated 2020 earnings for retailers with exposure to household goods will be extended via the housing cycle. A net effect of the pandemic and the housing cycle is likely to mean elevated earnings for three years, as opposed to normalising in 2021.
Low mortgage rates, fiscal support and a willingness of banks to lend are all pre-determinants of strong housing activity. Still, the broker retains a Hold rating on JB Hi-Fi as the magnitude of the housing cycle is considered largely factored into forecasts.
The demand generated by a buoyant housing market should tilt expenditure towards furniture, electronics and hardware and JB Hi-Fi, along with Harvey Norman ((HVN)), is one of the most leveraged retailers to the housing cycle.
There are six Hold ratings on FNArena's database and one Buy (Credit Suisse) for JB Hi-Fi. Targets range from $41.40 (Morgans) to $53.02 (Credit Suisse. The consensus target is $48.39, signalling 5.2% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.5% and 3.9% respectively.
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