JB Hi-Fi: Upgrade to ADD on valuation grounds
About the author:
- 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.
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.
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).
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.
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.
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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