JB Hi-Fi: Glidepath not cliff edge? We increase estimates after 1H22 pre-announcement indicates resilient demand

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
19 January 2022, 8:00 AM
Sectors Covered:
Gaming and Retail

  • JB Hi-Fi (ASX:JBH) preannounced a strong 1H22 result. Due mainly to unexpectedly resilient margins at The Good Guys (but at JB Hi-Fi Australia too), EBIT was 17% above our estimate and 16% above consensus. EBIT was down 9% yoy but 60% above 1H20. Sales were also better than forecast due to ‘continued heightened customer demand for both consumer electronics and home appliance products’.
  • We have updated our model following the 1H22 preannouncement. We have increased our group sales forecast for FY22 by 4.2% to $8.8bn. We have increased our group EBIT forecast for FY22 by 10.3% to $624m.
  • We reiterate our ADD recommendation on JBH. The company’s 1H22 performance indicates that a combination of a strong market position, ‘heightened’ customer demand, and good cost control makes the stock inexpensive at current multiples, even after today’s rally. Our price target increases (login to view).

Event

JBH released the headlines of its 1H22 performance ahead of the full result on 14 February. It was positive both in terms of sales and margin.

1H22 group sales were $4.86bn, exceeding our estimate by 5.7%, driven by outperformance in both JB Hi-Fi Australia (+6.0% vs MorgansF) and The Good Guys (TGG) (+5.6%). Sales were 2.9% above Visible Alpha consensus. Online sales were up 62.6% yoy to $1.1bn and comprised 22.7% of total sales.

EBIT of $420.5m was 16.9% above our estimate and 15.7% above consensus ($363.3m). This was mainly a function of a much better margin performance by TGG. TGG’s EBIT margin was 8.4%, down only 30 bp yoy and 250 bp above our estimate.

Analysis

LFL sales were negative in each division against a strong PCP, but comfortably above 1H20 on a 2-year stack.

JB Hi-Fi Australia reported LFL of (2.5)% vs 1H21 but 20.8% above 1H20. JB Hi-Fi NZ reported LFL of (4.5)% vs 1H21 but +4.2% vs 1H20. TGG reported LFL of (1.3)% vs 1H21 but +24.7% vs 1H20. We have increased our FY22 group LFL sales growth forecast from (6)% to (2)%.

In our opinion, the resilience of JBH’s earnings in 1H22 against the exceptionally strong comps of the PCP suggests that the adjustment of Australian consumer spending post-lockdown is less pronounced than might have been assumed.

The consumer continues to want to spend on electronics and home appliances and it may be some time before other calls on household spending such as holidays overseas change this. The ‘rebalancing’ of consumer spending may prove to resemble a glidepath rather than a cliff edge.

Forecast and valuation update

We have increased our group revenue forecast by 4.2% for FY22 to $8,792m and by 4.0% for FY23 to $8,952m. Our gross profit margin forecast for FY22 rises from 21.5% to 21.7% (FY21A: 22.2%). This flows through to a 10.3% increase in FY22F EBIT to $623.9m and a 6.5% increase in FY23F EBIT to $590.2m.

Our DCF and EV/EBIT-based price target rises by 6% from (login to view).

Investment view

We continue to see current trading multiples for JBH as inexpensive on the basis of historical average and peer group comparison. We believe the business is more resilient than many might have thought.

While we do not think JBH should trade at a premium to retailers with more network expansion opportunity, current prices still offer good upside. We reiterate our ADD rating.

Price catalysts

Further trading updates, either at the 1H22 result on 14 February or thereafter, could provide further evidence of the robustness of demand.

Risks

JBH is often seen as a ‘COVID beneficiary’ and an unexpected drop-off in customer demand would be detrimental to our positive recommendation.

Increased promotional activity and cost inflation may see margins come up under more pressure than forecast.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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