JB Hi-Fi: Updating estimates after strong FY22 earnings release
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 19 July 2022, 12:15 PM
- Sectors Covered:
- Gaming and Retail
- 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.
- Earnings update after FY22 preliminary earnings release.
- 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
- 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.
- 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.
- 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
- 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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