Breville Group: 1H22 result - Full of beans

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
17 February 2022, 11:15 AM
Sectors Covered:
Gaming and Retail

  • Breville Group’s (ASX:BRG) 1H22 earnings were above expectations. Sales momentum was sustained through 1H22 and EBIT margins were managed well in a ‘turbulent’ environment.
  • We think the pace of sales growth will continue to exceed that of the broader category as BRG steps up its investment in R&D and marketing and expands its geographic footprint.
  • Our FY22 EBIT estimate rises 2% to $158m, slightly above guidance of c$156m.

Event

1H22 EBIT was $112.5m, up 23% yoy and 10% above our estimate of $102.5m. This was a function of sales 10% above forecast, partly offset by lower gross margins than we had expected.

The interim dividend was 15c (14.5c). BRG guided to FY22 EBIT in line with current consensus ($156m).

Analysis

Sales momentum

Constant currency growth in Global Product was 23.8% in 1H22 (27.5% 2-year CAGR). EMEA, supported by the entry into new markets including France, Italy and Portugal, led the way with 39.4% (50.0% 2-year CAGR). There are precious few indications that consumer demand for its products is falling away.

Although we think a level of moderation is inevitable as consumer spending rebalances post-COVID, it is likely consensus is too cautious.

We have increased our group revenue forecasts by 6% in both FY22 and FY23, assuming constant currency growth in Global Product of 19.1% and 11.6% respectively. Sales momentum will be bolstered by selected price increases and an FX tailwind.

Working capital

Despite warning at the AGM that it would take a lengthy period of time to do so, BRG had largely rebuilt its inventories by the end of 1H22. Working capital was above expectations at December 2021; this was also because strong 4Q sales pushed up receivables.

Net working capital to the last six months’ sales was 37.9% at the end of 1H22, compared to 28.6% at 1H21.

While the receivables balance will soon fall back, BRG was careful to flag that it will continue to invest in inventory. It regards its $293m period-end inventory level as around $30-40m ‘below equilibrium’. It said it would like to ‘overshoot’ the equilibrium level at the end of 2H22 ‘as a hedge against further supply chain disruptions’.

We forecast year-end inventories of $322m. This investment in stock is expected to weigh on FY22 operating cash flow, which we forecast at just $32m (FY21: $124m).

Operating costs

BRG’s full year guidance implies a 72/28 1H/2H EBIT split. This is well below the average of the past four years (65/35). While we think BRG is adding a dash of conservatism to its guidance, we do think it’s likely to be broadly representative of what is likely to happen in 2H22.

It seems to us that BRG held back on expenditure on R&D and IT in 1H22, enervated perhaps by the supply chain challenges and uncertainty about the trajectory of consumer demand.

This helps explain why 1H22 EBIT was 10% above our forecast when gross profit was only 5% above. So now with every indication that the topline will grow by >20% in FY22, BRG is flagging it will step up this investment in 2H22.

Forecast and valuation update

Our EBIT estimate for FY22 increases by 2% from $155.5m to $158.3m. Our EBIT estimate for FY23 also increases by 2% from $175.9m to $179.2m. Our EPS estimates rise by 1.9% in FY22 and 2.0% in FY23.

Our target price is the average of our DCF and EV/EBIT-based valuations. Lower peer company multiples and use of a higher WACC in our DCF takes our target down from (login to view).

Investment view

In our opinion, BRG deserves to trade at a premium multiple.

It is positioned to deliver double-digit sales growth consistently over the next few years as it grows its market share, notably in geographies into which it has recently launched.

Our rating remains ADD.

Risks

The greatest risk to our investment view is that sales growth may not eventuate as we expect.

A moderation in the pace of category growth seems inevitable post-COVID, and if BRG is unable to grow faster than the broader market, we will be wrong about our ADD call.

Find out more

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