JB Hi-Fi: Updating estimates after strong FY22 earnings release

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By Alexander Mees

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Head of Research

Date posted:

19 July 2022, 12:15 PM

• JBH performed much better in FY22 than the market expected. In its preliminary earnings release, JBH indicated that second half margins and sales momentum were very strong, leading to full-year EBIT 12% higher than consensus forecasts.
• We have increased our EBIT estimates by 14% in FY22 and 4% in FY23. We expect strong sales momentum to be sustained into early FY23, against soft comps, though declining consumer confidence and higher input costs are likely to lead to a year-on-year decline in earnings in FY23.
• We regard JBH as undervalued at current multiples and reiterate our ADD rating.

Event

• Earnings update after FY22 preliminary earnings release.

Analysis

• JB, you’ve done it again. EBIT grew by 33% year-on-year in 2H22, with margins expanding from 7.1% to 8.6%. This resulted in full-year EBIT of $794.6m, 14% higher than our estimate and 7% higher than earnings in what was assumed to have been the ‘peak’ year of FY21. Sales momentum was strong all the way through 2H22. In JB Hi-Fi Australia, comparable sales growth accelerated from 3.6% in January to 11.1% in Q3 and 10.9% in Q4. But it was the margin that really impressed. Higher 2H22 margins were a function of positive operating leverage on the strong sales growth as well as an ‘improvement in gross margins’.

• What does this mean for the broader retail sector? JBH’s preliminary results could not be clearer: the Australian consumer is still shopping and appears to be prepared to pay higher prices for items they want to buy. This is not inconsistent with recent ABS retail sales data (which run to the end of May), but JBH’s figures suggest that sales momentum was sustained up to the end of June, despite two hikes in the RBA cash rate before then. We suspect JBH will not be the last retailer to report better-than-expected sales and margins in FY22. We also suspect, however, that the rather muted market reaction today to JBH’s double-digit earnings beat could be indicative of the way investors are likely to treat good FY22 numbers. In the absence of forward guidance, investors will likely remain cautious given the prospect in FY23 of softening consumer demand and higher input costs.

Forecast and valuation update

• EBIT estimates increase by 14% in FY22 and 4% in FY23. Our FY22 EBIT estimate rises by 14% to match the pre-announced figure of $794.6m. We have increased our FY23 EBIT estimate by 4% to $605.5m. This is a function of a higher assumed gross margin on largely unchanged sales assumptions. We still expect margins to contract in FY23 as sales growth turns negative and cost inflation bites.
• Target price rises (login to view). Our DCF and EV/EBIT-based target price increases as a result of our higher earnings estimates and increased peer company multiples.

Investment view

• We see JBH as a well-run retailer with good cost discipline, a low-cost operating model, a compelling and effective omnichannel offer, a robust balance sheet, and a strong market position. We retain an ADD rating.

Price catalysts

• Full earnings on 15 August. JBH will release its full earnings on 15 August. It will provide a trading update for July 2022 then, which we think is likely to be strong given the momentum in the business and the fact that trading in July 2021 was impacted by the onset of lockdowns in NSW and Victoria.

Risks

• COVID tailwinds abating. JBH is often regarded as a ‘COVID beneficiary’ and a material drop-off in customer demand would be detrimental to our positive recommendation.
• Price competition and inflation. Increased promotional activity and cost inflation may eventually see margins come up under more pressure than forecast.
• Housing downturn. Domestic appliances make up a significant proportion of JBH’s sales. Demand could come under pressure in a housing downturn.

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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.