JB Hi-Fi: ‘Heightened customer demand’ continues; Earnings estimates increased

About the author:

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

  • JB Hi-Fi (ASX:JBH) continues to experience strong sales growth driven by ‘heightened customer demand’. Its latest trading update shows comparable sales growth accelerated in February and March, with JB Hi-Fi Australia particularly robust.
  • We have increased our comparable sales growth forecast at the group level by 200 bp from a decline of (0.3)% to positive growth of +1.7%. This, combined with higher margin estimates, pushes up our FY22 EBITDA forecast up by 5%.
  • We reiterate our ADD rating, with an increased target price of (login to view).

Event

As part of the disclosure process around its buyback, which closes on 8 April, JBH has provided the latest comparable and total sales growth figures for the period of 1 January to 23 March (‘Q3 to-date’) and FY22 YTD.

All three of JBH’s divisions had a good February and March, with the company reporting a continuation of 'heightened customer demand and strong sales growth'.

Analysis

JB Hi-Fi Australia: The JB Hi-Fi brand in Australia had a very strong February and March, taking comparable sales growth into positive territory on a rolling year-to-date (YTD) basis. Comparable sales growth in Q3 to date was +10.5%, pushing FY22 YTD comparable sales growth to +0.9%.

This is an improvement on the (1.9)% comparable sales decline reported for 1H22. JBH reported in February that comparable sales growth in this division in the month of January was +3.6%, so the latest information implies comparable sales growth in February and March-to-date was around +14.5%.

JB Hi-Fi New Zealand: There was a good improvement in sales growth across the Tasman too. Comparable sales growth in Q3 to-date was +2.9%, taking the FY22 YTD comparable sales performance to a decline of (2.5)%, an improvement on the 1H22 decline of (4.5)%. The comparable sales decline in January was (1.8)%, which we estimate implies a positive performance in February and March-to-date of +5.6%.

The Good Guys: Not to be outdone, The Good Guys (TGG) saw a lift in its comparable sales growth as well. In Q3 to-date, comparable sales growth was +5.1%, taking FY22 YTD comparable sales growth to +0.5%, up from a decline in 1H22 of (0.8)%. Comparable sales growth in January was +1.9%, which implies the performance in February and March-to-date was around +7.0%.

Forecast and valuation update

We have increased our FY22 comparable sales growth forecasts to +2.0% for JB Hi-Fi Australia (up from a decline of (1.0)%); up to (2.5)% for JB Hi-Fi New Zealand (from (5.5)%); and to +1.5% for TGG (up from 0.0%).

At the group level, our comparable sales growth forecast increases by 200 bp from a decline of (0.3)% to positive growth of +1.7%. Our comparable sales forecasts for FY23 are largely unchanged.

With positive operating leverage working through the business as a result of higher sales, our post-AASB 16 EBITDA estimate increases by 5.3% to $898m in FY22 and by 3.7% to $821m in FY23. Our EPS estimates increase by 7.5% to 401.6c in FY22 and by 5.1% to 385.4c in FY23.

Our DCF and EV/EBIT-based target price increases from (login to view).

Investment view

We see JBH as a well-run retailer with good cost discipline, a robust balance sheet and a strong market position.

We regard JBH as undervalued at current multiples despite its good sales momentum and reiterate our ADD rating.

Risks

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

Increased promotional activity and cost inflation may eventually 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.

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