JB Hi-Fi: 1H23 earnings - Value through the cycle
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 14 February 2023, 7:00 AM
- Sectors Covered:
- Gaming and Retail
- The 1H23 result was in line with JB Hi-Fi’s (ASX:JBH) January preannouncement.
- We have made no major changes to our estimates, increasing our FY23 EPS forecast by 1.6% and reducing our FY24F EPS forecast by 2.5%.
- We retain an ADD rating and (login to view) target price.
JB Hi-Fi’s (ASX: JBH) headline sales and profit numbers were all in line with last month's trading update. The dividend rose 21% to 197c. Sales grew 8.6% in 1H23 to $5.48 billion with comparable (LFL) sales growth of +8.5% at JB Hi-Fi Australia and +7.3% at The Good Guys.
The group gross margin increased by 90 bps to 22.8%. EBIT was up 14% to $479.2m. Sales growth moderated in January, but remained positive and were slightly better than we had forecast.
Morgans comment #1: It is no surprise that sales will moderate in 2H23
In our opinion, there should be no surprise around JB Hi-Fi’s comments that sales growth will moderate in the second half. LFL sales growth in January eased to +1.5% at JB Hi-Fi Australia and 0.0% at The Good Guys.
This compares to +3.6% and +1.9% respectively in January last year. We think LFLs will almost certainly go negative as JBH starts to cycle increasingly positive comparative numbers. In FY22, LFLs started the year in negative territory before accelerating markedly in the second half.
The LFL sales growth of +8.5% achieved by JB Hi-Fi Australia in 1H23 was achieved against easy comps of (2.5)% in 1H22. The comp steps up to a far more challenging +9.3% in 2H22 and we expect negative LFLs of (5.3)% in 2H23 as JBH cycles the immediate post-lockdown surge in retail spending last year.
What this trading pattern obscures is the underlying growth in both the consumer electronics market and JBH’s share of that market. We forecast group sales will be $4.18 billion in 2H22. While this is 4.3% below 2H22, it’s 5.2% above 2H21 and 6.6% above 2H20.
Morgans comment #2: Gross margins will normalise but not collapse
During COVID, JBH’s gross margins were supported by a reduction in promotional activity as a result of restricted stock availability and high levels of customer demand. JBH suggested today that gross margins in JB Hi-Fi Australia would be likely to fall back to pre-COVID levels. This is in line with our expectations.
The average gross margin in that division was 22.1% in the pre-COVID period FY17- 20. We model margins falling from 22.8% in 1H23 to 22.1% in 2H23 and 22.2% in FY24. Some of the gross margin improvement at The Good Guys has been achieved through sustainable improvements in purchasing terms and, while margins are likely to moderate as discounting picks up, we don’t see them reverting to pre-COVID levels.
We forecast gross margins to fall from 24.1% in 2H22 and 23.2% in 1H23 to 22.1% in 2H23 and 22.4% in FY24. The Good Guys’ gross margin averaged 20.7% in the pre-COVID period FY17-20. It is more challenging for the small JB Hi-Fi New Zealand business, which does not enjoy the same leverage with suppliers as the business in Australia.
Gross margins fell from 17.5% in 1H22 to 16.1% in 1H23. We model this remaining subdued at 15.8% in 2H23. Supported by more favourable FX and freight rates, nonetheless, we believe JBH will see its group gross margins fall only slightly. We forecast 22.38% in FY23 and 22.07% in FY24 (FY22: 22.53%).
Changes to earnings estimates
We have increased our EPS estimate for FY23 by 1.6% to 429.6c. This is driven by a higher gross margin forecast of 22.38% (was 22.04%). Our EPS estimate for FY24 declines by 2.5% to 414.4c. This is driven by a 1.3% lower sales forecast.
We see JBH as a ‘category killer’, particularly in consumer electronics, and we believe it will continue to increase its share of the market in the months and years to come. The business has a strong balance sheet with a forecast post-AASB 16 ND/EBITDA ratio of just 0.2x at the end of FY24. JBH offers a 6% FY24F dividend yield and trades on less than 12x P/E in that year.
Our target price has JBH trading on 14x FY24F P/E, which we do not see as excessive for a business of this quality. We retain an ADD rating and (login to view) target price.
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