After Sudden Dimming, Beacon Building up the Lumens
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Having seen off the Masters debacle, and put in place a range of extensions to its offering, Beacon looks to be poised for solid growth.
Australia’s largest retailer of residential lighting and ceiling fans, Beacon Lighting Group (BLX), has followed a path on the share market in its listed life that is similar to several other small-cap floats in recent years: a successful debut, market euphoria, sudden disappointment through a profit downgrade, and price collapse.
But Beacon is one stock that has worked determinedly since to get its financial performance and share price headed in the right direction.
Beacon, which was founded in 1967, listed on the Australian Securities Exchange (ASX) in April 2014, after raising $63.9 million through the sale of 96.75 million shares priced at 66 cents each. The deal valued the company at $142 million. Beacon did not raise any new capital through the float: the initial public offering (IPO) was a vehicle for Martin Hanman, an electrician who had been a silent partner since 1997, to cash out his 45% stake.
The Robinson family retained 55% of the stock. Ian Robinson, who started working in the first Beacon store in 1969, is executive chairman: his son Glen is Beacon chief executive officer.
The shares rocketed to $1.06 when they hit the ASX screens, and it was all systems go to a peak of $2.19, in May 2015. The stock then traded sideways until May 2016, waiting for earnings growth to catch up, and like plenty of small industrials in that situation, Beacon developed a bad case of altitude sickness. Following a familiar route for a stock that had acquired all the trappings of a market darling, Beacon brought out a profit warning that disappointed the market severely, and the shares promptly plunged by 30%.
From peak to trough, the shares lost 42%, to $1.219 in May 2016. But since then, Beacon has moved back to $1.73, which capitalises the stock at $372 million.
According to Thomson Reuters, the analysts who follow Beacon have a consensus price target $1.92 – which would represent a gain of 11% if that gap were closed.
Analysts expect earnings per share (EPS) to grow by 8.8% in FY17, to 9 cents, and the dividend to be lifted from 4.7 cents in FY16 to 5 cents. In FY18, the consensus looks for EPS of 10 cents (up 11.1%) and the dividend to be maintained at 5 cents, fully franked.
At the time of listing, Beacon Lighting Group owned 71 stores with another 14 stores run as franchises. At present, after opening four stores in 2016 and buying back three franchise stores and converted them to company-owned stores, Beacon has 99 stores, with eight operated as franchises.
The company says it wants to open six new company-operated stores in Australia each year: it says it has identified 47 potential new store sites.
Beacon says it sources more than 90% of its product directly rather than going through wholesalers. More than 80% of stock is manufactured offshore, mostly in China, under the Beacon brand.
This month, Beacon reported its result for the December 2016 half-year. Revenue grew by 10.9%, to $109.2 million, but net profit slipped by 15%, to $9.4 million.
But what was interesting in the numbers was the effect on Beacon of the closure by Woolworths of the Masters hardware chain, announced in August 2016 and completed at the end of the year. More than half a billion dollars of discount hardware was offloaded by Masters in a massive fire sale – and lighting was a part of that. In managing to grow its same-store sales (company stores) by 1.2% over the period, and maintaining its market share, Beacon felt that it competed against the Masters closure as well as it could – but inevitably, the gross profit margin was hurt, falling from 65.9% to 62.1%.
But with Masters’ desperate discounting behind it now, Beacon says it had an “encouraging” finish to the first half, and company-store comparative sales “have made a positive start to the new half year.” In fact, Beacon is investigating whether any ex-Masters store locations would suit a Beacon Lighting store.
Beacon is also looking to develop the other arms of its business. In 2016 it bought Melbourne-based Masson for Light, an architectural lighting products supplier, and its Masson Manufacturing business, which develops bespoke lighting products. The Beacon Solar business sells solar power panels, inverters and systems, for both residential and commercial customers, and specialises in customers wanting to move “off-grid.” Since 2015, under the brand Light Source Solutions, Beacon has been the sole distributor in Australia and New Zealand for GE’s commercial and residential LED (light-emitting diode) lighting business: LED technology is transforming lighting, using up to 80% less energy and lasting up to five times longer than traditional lighting.
LED’s share of the lighting market has grown rapidly. According to McKinsey, LEDs represented just 14% of the lighting market in 2010, but by 2016 this share had grown to 58% – and LED’s share is predicted to rise to 78% by 2020.
Beacon Lighting Commercial works with commercial clients – such as office builders, residential developers, Aged Care facilities, hotels and the retail industry – to provide lighting and project management services. Beacon International is the group’s international wholesale lighting business, the job of which is to license the group’s intellectual property to international customers. In 2016 Beacon also set up international businesses, in the US and Germany, to operate e-commerce and wholesale businesses in those markets.
Having seen off the Masters debacle, and put in place a range of extensions to its offering, Beacon looks to be poised for solid growth. It is not the greatest yield generator on the market – its forecast 5-cent dividend in FY17 equates to a prospective fully franked yield of 2.9% – but the anticipated dividend lift to 6 cents in FY17 starts to look a touch better, at 3.5%. At this point, however, investors are buying Beacon for the growth prospects – which look nicely lit up.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au