We have long considered Breville Group (ASX:BRG) to have highly attractive fundamentals. After an equity raising in May 2020 to support its potentially company-changing international expansion plans and capital expenditure requirements, the shares have re-rated strongly up to the release of its full-year results.
However, since that time, the share price has retraced some of its gains. Accordingly, our recent analysis on the Company was undertaken to assess the prospects for a re-rating.
About Breville Group
Breville Group manages of a number of consumer electrical appliance brands, with a core focus in the small kitchen appliances segment. Under a recently-implemented new organisational model, the operations of BRG now comprises two segments:
i. The ‘Global Product’ segment – focused on the design, development and sale of Breville-branded products. These are supplied in 65 countries to the premium kitchen segment of the market. This segment accounts for 80% of group revenue. It comprises contributions from three regions: North America, Australia and NZ (ANZ), and Rest of World (ROW).
ii. The ‘Distribution’ segment, which distributes products that are designed or developed by a 3rd party pursuant to a license or distribution agreement. The distribution of these products may be sold under a brand owned by BRG (e.g. Breville, Kambrook) or distributed under a 3rd party brand (e.g. Nespresso).
Key Factors Underpinning Earnings Growth Outlook
While BRG has been a clear beneficiary of increased discretionary/at-home spend as a result of COVID-19, earnings for FY20 have not substantially benefited from these trends. Growth has been in line with historical levels. It is also worth noting that the 1H/2H revenue growth over the course of FY20 was +25.4%/+25.2%, respectively. This indicates no significant acceleration of growth rates despite COVID-19.
Despite the above trend, there is scope for operating leverage in future years from increasing the proportion of online sales, which is a partly COVID-19-driven trend. At present, online sales are estimated to represent >25% of BRG’s sales. Aside from COVID-19 factors, increasing this proportion makes strategic sense. This is given that online sales for BRG’s major US partners account for ~50% of their overall sales as 100% for Amazon, which is a major global customer. A key benefit from accelerating online sales growth is that distribution through online retail channels can support margins given the low fixed costs and the fact that a physical retail presence is not required for the online channel.
In addition, BRG’s strategies of new product development and geographical expansion are ongoing, which we expect to assist earnings growth over coming years. The Company has been steadily adding new geographies in recent years. Portugal, Italy, and Mexico will be new geographies in FY21. Continued investment in R&D will drive the new product development pipeline that will fill shelves in these new geographies over time.
Given the success of the expansion into Western Europe – which has grown faster than any other region and is expected to contribute a greater share of total revenue over time – the Company has plans to expand into Asia and the Middle East. The Middle East is currently in the process of transitioning to Sage (new expansion through partners).
New product launches have historically been successful from the point of view that they have enabled BRG to generate market share growth. They are also reflective of the Company’s commitment to investment in R&D and marketing. This increases the speed of new product delivery and are important factors in driving sales growth in the medium to long-term.
BRG has a highly attractive investment case, underpinned by: i) Deeper penetration of existing categories (i.e. share gains), ii) Strong new product development capabilities, iii) Expansion of its international presence from both new products and via new market entry and iv) A strong balance sheet position (net cash position of $128.5m with no debt) that can fund both complimentary acquisitions and R&D.
The shares are currently trading on a 1-year forward P/E multiple of ~35x. While the shares have retraced off its recent highs, investors are clearly prepared to pay such a hefty multiple given these factors, which essentially contribute to expectations for low-double-digit EPS growth in FY22 and accelerates to around +22% EPS growth in FY23.
While we remain attracted to the long-term fundamentals, we consider that further share price weakness would present a more attractive entry opportunity.
BRG spent several weeks struggling to push beyond the $28 region (circled), before falling away again. At the moment it is making lower highs and lower lows. This means that we are likely to see the shares come back to cheaper levels from here. There appears to be some good support near $22 so any buying support near there should provide a better entry level.
Michael Gable is managing director of Fairmont Equities.
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