Small Caps | Jun 21 2012
– Moelis reiterates Buy rating on Breville
– Broker comfortable with forecasts post meeting with management
– International operations remain the driver of earnings
– Implies further upside from current levels
By Chris Shaw
Having already rated Breville Group ((BRG)) as a Buy, the positive view of Moelis has been reinforced following a meeting with management of the electrical appliances group.
Feedback from the meeting indicated the Domestic Electricals business, which accounts for around 30% of group earnings, has performed satisfactorily in 2H12 despite a still subdued economic environment.
At the same time, despite no major new product releases in the second half of FY12 the International division, which represents about 70% of group earnings, has performed in line with the expectations of management.
The international operations continue to represent the main growth driver for Breville, as Moelis notes the Breville brand in the US still has a less than 10% market share in the US$2 billion niche top end market segment.
Moelis sees as achievable the objective of sustainable 10-15% per year constant currency revenue growth over the next 10 years or so in the US operations. This reflects strong consumer acceptance of higher margin new products and ongoing scale improvements from an increased distribution footprint.
For FY12, Moelis is forecasting EBITDA (earnings before interest, tax, depreciation and amortisation) of around $68 million, which is slightly ahead of guidance of a result between $65-$67 million. In earnings per share (EPS) terms this translates to a forecast of 32.2c, rising to 36.3c in FY13. This compares to consensus EPS forecasts according to the FNArena database of 32.5c and 35.2c respectively.
On the forecasts of Moelis, Breville Group is trading on a FY13 earnings multiple of around 12 times. This is regarded as undemanding given the growth potential on offer in the US and the fact the company has $45-$50 million in net cash that can be used to boost growth or lift returns to shareholders.
This makes the stock a preferred 'Buy and Hold' in the small industrials space for Moelis, even allowing for some near-term consolidation following strong share price performance this year. The other attraction of Breville is a solid yield, as Moelis expects dividends of 20c this year and 22.5c in FY13. This translates to a fully franked yield of 4.6% this year, rising to 5.1% next year.
Despite a market capitalisation of less than $600 million Breville receives some coverage by brokers in the FNArena database. Macquarie and Credit Suisse both rate Breville as a Buy and UBS rates the stock as Neutral.
The Buy argument is the same in that the international operations offer strong longer-term growth potential and so justify a positive view according to Macquarie, while UBS's Neutral view is a valuation call as the broker downgraded from a Buy last month on the back of share price gains made so far this year.
The consensus price target for Breville according to the database is $4.37, with a range from Credit Suisse at $3.80 to Macquarie at $4.80. Moelis has a price target on the stock of $5.00.
Shares in Breville today are unchanged at $4.38 in early trading in a slightly stronger overall market. Over the past year the stock has traded in a range of $2.51 to $4.66, the current share price being in line with the consensus target in the FNArena database.
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