JB Hi-Fi: Upgrade to ADD on valuation grounds

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
17 January 2022, 10:30 AM
Sectors Covered:
Gaming and Retail

  • We upgrade our recommendation for JBH from HOLD to ADD.
  • There are no changes to our earnings estimates or (login to view) price target. There is now 20% upside to our target price and a 25% estimated 12-month TSR.
  • JBH reports its 1H22 results on 14 February. If the ‘heightened customer demand’ reported at the AGM has continued through to the end of December 2021, the 1H22 result may be taken positively.

Event

We upgrade our recommendation from HOLD to ADD following a period of underperformance that has seen the share price decline 11% since 1 November, underperforming the ASX 100 by 12%. Our change in recommendation reflects the more attractive risk-return profile of the stock at current levels.

Analysis

At the current share price, we believe JBH’s valuation looks compelling. At a one-year forward EV/EBITDA of 7x and a one-year forward P/E of 16x, JBH is now considerably cheaper than its historical averages.

On the basis of Factset consensus, JBH’s FY1 EV/EBITDA multiple is 15% lower than the average of the past three years and its FY1 P/E is 11% lower.

Forecast and valuation update

There are no changes to our earnings estimates.

There is no change to our 12-month price target of (login to view).

Investment view

We do not believe investors should pay a premium multiple for JBH, despite its powerful category leadership, extensive network, and cost efficiency. This is
because the business is well penetrated across Australia (and New Zealand) and we see limited potential for network expansion, barring further M&A.

We note that it’s now more than five years since the acquisition of The Good Guys. As discussed above, however, current multiples are set at anything but a premium. There is a correct price for a high-quality, cash generative business, with limited network expansion potential, but paying a good dividend and the current share price isn’t it.

With our unchanged price target implying 25% 12-month TSR, we upgrade to ADD.

Price catalysts

JBH releases its 1H22 result on 14 February. Against the exceptional comps of the PCP, we expect earnings to be down considerably in 1H22. We forecast 7% lower sales ($4.6bn); 19% lower EBITDA ($464m on an AASB 16 basis); and 21% lower NPAT ($250m). Our EBITDA estimate is 2.7% lower than Visible Alpha consensus. Our NPAT estimate is 1.3% lower.

At its AGM in October, JBH reported a bright start to FY22 with 1Q22 LFLs in the flagship JB Hi-Fi Australia business down (7.9)% against the exceptional comps of 1Q21, but up +17.3% against 1Q20. JBH reported ‘heightened customer demand’ in the period. If these dynamics continued in 2Q22, there could be upside risk to our 1H22 estimates and those of the market.

Risks

JBH is seen as a ‘COVID beneficiary’ and a 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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