Capital Management Upside For JB Hi-Fi?

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

The potential for ongoing strong cash realisation for JB Hi-Fi is fueling broker speculation for increased dividends and capital management.

-Resilient margins at The Good Guys were key to JB Hi-Fi’s positive trading update
-Strong sales recovery across all brands in the second quarter
-Online sales were a key contributor to the result
-Potential upside for dividends and capital management

By Mark Woodruff

Brokers have generally raised 12-month target prices for JB Hi-Fi ((JBH)) after the company's trading update revealed first half earnings (EBIT) of $420m, well in excess of the consensus estimate for $363m.

Management noted that trading was robust across all divisions, driven by strong demand for consumer electronics and home appliances. Online growth again increased by 22.7% in the first half compared to 13.7% in the previous corresponding period (pcp).

The omicron variant is delaying the reversion to normal trading conditions from elevated levels, which has increased upside risk to household goods spending in 2022, according to Credit Suisse.

Even after a strong share price rally in reaction to the update, Morgans believes the stock is inexpensive at current levels. The broker feels the first half performance is indicative of a strong market position, heightened customer demand and good cost control.

The analyst attributes the positive results to unexpectedly resilient margins at The Good Guys, where earnings margins remained elevated in the first half at 8.4% versus 8.7% for the pcp, as gross margins benefited from tight product availability and a positive mix shift.

Meanwhile, UBS feels improvements that were initiated pre-covid saw the company well positioned to leverage the boost in store traffic due to covid. Improvements included better merchandising, ranging and staff incentives. The broker maintains its Neutral rating and lifts its target price to $51 from $50.

As noted by Credit Suisse, sales revenue recovered strongly in the second quarter across all brands. Arguably the trading update could have been even more positive, according to the analyst, were it not for stock positions that have been very tight across the whole industry. The broker maintains its Outperform rating, lifts its target price to $58.80 from $55.86 and sees little downside risk to valuation along with potential for a FY23 earnings upgrade.

Other alternatives?

Citi retains a Neutral rating (and $54 target price), which reflects its preference for other discretionary retailers in Harvey Norman ((HVN)) and Super Retail Group ((SUL)).

Morgans also alludes to other alternatives and suggests the company should not trade at a premium to retailers with more network expansion opportunity. The business is considered well penetrated across Australia and New Zealand, with limited potential for network expansion, barring further M&A. Nonetheless, the broker still sees good upside, reiterates its Add rating and lifts its target price to $57 from $54.

On the other hand, Ord Minnett retains the company as its preferred exposure within retail due to the demand tailwinds from housing and work from home, online profitability and limited supply chain risks. Ord Minnett's target price rises to $56 from $54 and the Buy rating is maintained.

Online

As Ord Minnett highlights, sales and earnings have increased by 22% and 60%, respectively, over the two years to the 1H22, despite just 1% growth in bricks and mortar sales.

This demonstrates to the analyst a highly profitable online channel that is in-line with store sales, as compared to many retailers that experience significant margin dilution. This is considered critical, given online penetration will likely continue to rise after a normalisation period in FY23.

Bell Potter, not one of the seven brokers monitored daily on the FNArena database, believes the online sales contribution is a key highlight of the result and demonstrates strong multi-channel capabilities (click and collect, phone and ‘store to door’). The broker lifts its target price to $49.60 from $48.50 and maintains its Hold rating.

Off-market buyback?

Ongoing strong cash realisation suggests to Credit Suisse upside risk for dividends and the potential for capital management.

Citi believes JB Hi-Fi could comfortably undertake an off-market buy-back of at least $300m to unlock part of its $470m franking credits balance.

FNArena’s database has six broker rating with four Buy and two Hold ratings, with Macquarie yet to update for JB Hi Fi’s trading update. A consensus target price of $54.88 suggests 10.8% upside to the last share price.

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