JB Hi-Fi: 1H23 pre-announcement - Don’t change the channel

About the author:

Author name:

By Alexander Mees

Job title:

Co-Head of Research and Senior Analyst

Date posted:

19 January 2023, 8:00 AM

Sectors Covered:

Gaming and Retail

• High levels of demand for consumer electronics and home appliances persisted through the second quarter of FY23, allowing JB Hi-Fi (ASX:JBH) to report higher record sales and earnings for 1H23. LFL sales growth exceeded our expectations in both JB Hi-Fi Australia and The Good Guys, while higher gross margins and good operating cost control flowed through to a 1H23 EBIT that was 14% higher than the PCP and 12% above our estimate.
• We have increased our FY23 EBIT estimate by 13% to take account of the higher 1H23 earnings and a more positive view of prospects for the second half. We continue to expect LFL sales to turn negative in 2H23 and operating margins to contract, but our forecast y/y reduction in group NPAT is now 15%, which is better than our previous expectation of a 25% decline.
• We retain an ADD rating on JBH, with an increased target price of (login to view). We continue to regard JBH as a well-run retailer with good discipline around pricing, promotions and cost management; a compelling and effective omnichannel offer; a robust balance sheet; and a strong market position. Although trading conditions will be more difficult in 2H23, we believe JBH is well placed to ride out the turbulence and deliver shareholder value over the medium-term.

Event

Pre-announcement of 1H23 earnings.

Analysis

Sales momentum is the key driver of higher margins. JBH reported that its gross margin ‘improved’ y/y in 1H23. We see this as a function of effective pricing and promotional strategies as well as tight management of COGS.

In our view, the fixed cost operating leverage effect of sustaining positive LFL sales growth in 1H23 was most impactful in driving the 40 bp increase in the EBIT margin to 9.1%, 90 bp above our forecast of 8.2%.

Customer shopping habits normalise. Online sales were 32% lower y/y, a result of a normalisation of customer behaviour in comparison with the COVID lockdown-fuelled spike in online sales in the PCP.

Online sales of $752m in 1H23 were actually 5% higher than our forecast of $713m, and the 14% penetration of overall sales more resilient than expected.

Potential upside risk even to updated estimates. Although we have taken our FY23 EBIT forecast by 13%, our revised estimate implies a 70/30 1H/2H weighting of full year earnings. JBH’s profits are seasonally skewed to the first half, which contains Black Friday, Christmas and Boxing Day, though the average 1H/2H distribution since FY09 has been 64/36.

Of course we do anticipate an inflexion in consumer spending in 2H23, which would naturally accentuate the skew to the first half, but we acknowledge upside risk to 2H23 earnings if the decline proves more benign than we assume.

Forecast and valuation update

Our FY23 EBIT forecast increases 13% to $679m. Our NPAT forecast increases by 13% to $462m. Our FY24 EBIT estimate increases by 6% to $623m and our NPAT forecast by 6% to $425m. Our DCF and EV/EBIT-based target price rises from (login to view).

Investment view

We retain an ADD rating. 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 ND/EBITDA ratio of just 0.3x at the end of FY23.

It has the ability to invest in growth initiatives, including, should the correct opportunity arise, M&A. JBH offers a 5.8% FY23F dividend yield and trades on 11.0x P/E in that year. Our target price has JBH trading on 12.5x FY23F P/E.

Risks

Price competition and inflation. Increased promotional activity and cost inflation may eventually see margins come up under more pressure than forecast.

Housing downturn. Home 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.