Breville Group’s ((BRG)) first half results, coming in ahead of expectations on most measures, have triggered a review of the outlook from several brokers. Sales growth is accelerating and the company has cycled through periods of strong new product launches.
Yet, guidance for 10% growth in operating earnings (EBIT) implies a softer second half. The company has attributed its conservatism to the fact that all regions will be cycling periods which have already benefited from new product releases.
Breville is also in the middle of a transition in Germany where it is converting to a self-delivery model from a traditional distribution arrangement. The latter will have a material impact on both second half and FY19 numbers. The company suggests a -$10m headwind in revenue in the second half.
First half net profit was $36.3m. The result showed 16% constant currency growth supported by strength in new products and previous launches. Even after allowing for increases in marketing and R&D expenditure, Ord Minnett projects a 12% compound annual growth rate in earnings to FY20.
The most attractive feature of this growth, in the broker’s opinion, is that it is self-funded and global. The brands are considered well-positioned, even in an investment year, and Ord Minnett upgrades to Buy from Hold.
Cash flow will need monitoring, however, UBS contends. Part of the soft cash performance in the first half can be explained by the peak in payables moving to around September, while the majority was from inventory building. The broker suggests it may be more than 12 months before the benefits of the consolidated warehouse will be seen in the accounts.
While expenses growth accelerated, Credit Suisse believes this is critical to entrenching the company’s brand globally. Strong sales in global products and robust distribution earnings will be used to fund reinvestment in the brand.
The level of sales being produced signal to the broker that earnings forecasts are being "undercooked", given the amount of incremental R&D/marketing expenditure being ploughed back into the business.
The company will take its Sage brand into Germany and Austria on a direct basis, having stopped supplying its third-party distributor in July 2017. UBS estimates the entry into this market could cost up to -$7m in FY18.
Germany/Austria should be bigger than the UK market by FY24, if there is successful take-up by retailers, and UBS flags a successful direct model in Germany as a precursor to expansion in France, Italy and Spain.
Ord Minnett projects that selling its own brands into Germany, Europe’s largest coffee market, will drive top-line growth for Breville over the next few years. The broker also suspects there is more to come from existing markets where the company is still under-represented in sales terms.
North America stood out for UBS and both this region and Australasia reported Breville-design sales that were 14-17% higher than two years previously. As the stock continues to trade on elevated multiples UBS sticks with a Neutral rating. Similarly, Macquarie finds the company executing well on its strategy but considers the current share price leaves little room for disappointment.
Wilsons, not one of the eight stockbrokers monitored daily on the FNArena database, also maintains a Hold rating with an $11.39 target. Further gains are expected in operations and market share but this is reflected in the broker’s forecasts already.
Wilsons is unable to imply a more positive outlook because of the difficulties with gauging the success of upcoming product launches, while further regional expansion brings execution risks.
Recent market share gains are related to beverage products, reflecting 40% of the portfolio. While the company will launch new products in the second half, the US and UK will be cycling difficult comparables.
Credit Suisse acknowledges all regions are now cycling periods which benefited from new product launches and the company will be affected by the transition in Germany/Austria. Yet, outside of the investment in Germany, 7.5% growth for the business appears very achievable and the broker upgrades to Outperform from Neutral.
Upgrades to the broker’s sales expectations elsewhere are largely a function of more clarity regarding the contribution of the Nespresso licence in North America, Aquaport in Australia and the Nestle Dolce Gusto arrangement. The broker does temper margin assumptions but not enough to offset sales upgrades.
Credit Suisse recently incorporated US tax benefits into its calculations but backpedals post the latest guidance, which suggests its “fake news” was misplaced, given transfer pricing structures.
Breville still expects the impact from US corporate tax changes to be favourable, but a smaller impact is likely because the company has its R&D in Australia where profits are earned accordingly.
FNArena’s database shows two Buy ratings and two Hold. The consensus target is $13.56, signalling -0.9% downside to the last share price. This compares with $11.59 ahead of the result. Targets range from $12.40 (Macquarie) to $15.60 (Ord Minnett).