Will JB Hi-Fi Run Out Of Puff?

This story features JB HI-FI LIMITED. For more info SHARE ANALYSIS: JBH

-Upcoming comparables difficult to cycle
-Tax incentives support end FY15 sales
-New Zealand the company's weak spot
 

By Eva Brocklehurst

JB Hi-Fi ((JBH)) running out of steam or is it full steam ahead? The electronics and electrical retailer's sales were sturdy in FY15 and results beat expectations. FY16 has started well but, on the back of the resulting run-up in the share price, several brokers cut their ratings as the stock now appears fair value.

One of those downgrading was UBS, to Neutral from Buy. The broker observes the company may be winning share and continuing to benefit from a strong housing market but the share price lifted 11% following the results. UBS upgrades FY16-18 forecasts by 7-8%.

The catalyst for the stock to continue to outperform will be earnings upgrades via a continuation of the current trends through the first half and further capital management, although UBS considers the latter unlikely in FY16.

Morgans has reinstated coverage of the stock with a Hold rating on the back of the result. The strength in margins was the main surprise. Mindful of the difficult comparables to be cycled in the second half the broker also considers the current valuation is fair. Small business tax incentives were of major benefit in June, in particular, while telco, fitness, computers and home appliances all performed strongly.

Yes, it was high quality result but that will not make it easy to cycle, Deutsche Bank maintains. The near-term outlook is favourable but the sharp price appreciation has more than made up for the earnings upgrades. The broker believes sales growth is likely to slow in the second half when comparables are more demanding and spending rises as a result of executing on growth initiatives.

Citi is a doubter, suspecting challenges will mount as momentum slows. The broker estimates that at least one third of second half growth in FY15 came from the federal government's accelerated depreciation initiative – the tax benefit that meant small businesses swooped on electronic purchases at the end of the financial year.

Moving into September-October successful product launches such as iPhone 6 will be lapped, and this is likely to mean a slowdown in comparable sales. Given a slowing is expected over the next year, Citi envisages scope for share price downside.

Macquarie is one of the downgraders, to Neutral from Outperform, believing the stock is now fully valued and investors should take profits. The broker notes sales growth is decelerating from the exceptional levels witnessed in the second half, according to guidance.

The upcoming first half is expected to be highly dependent on Christmas sales, while the second half outlook is even more challenging as comparables are cycled. Despite the downgrade to its rating Macquarie believes the stock is solid, and it remains the broker's preferred discretionary retailer.

There are broader drivers, including the Home and online businesses, which JP Morgan expects will offset weakness in software and the visual sector. Still, the broker accepts the rate of growth is unlikely to be sustained. JP Morgan does not find the valuation stretched, as yet, but retains a Hold rating.

New Zealand is somewhat of a problem for the company, Credit Suisse asserts. Sales in NZ fell 2.5% on a like-for-like basis in the second half. An exit would probably cost more than sustaining the business so the company is expected to try to improve its position. Of significance, in the broker's view, is a the lack of scale and a narrow focus on consumer electronics and arriving at the right Home format will be important to finding success across the Tasman.

On the broader subject of the Home performance, the company did not provide separate disclosure of sales, as has been the case previously. Credit Suisse suspects, from numbers gleaned, that the economics of the Home stores still require some fine tuning, particularly in relating sales productivity to rental requirements.

In contrast, small appliances are seen as a growth opportunity. JB Hi-Fi expects to have 18 stores with small appliances by November this year and plans full coverage eventually. Credit Suisse estimates, with 103 shopping centre stores, this signals an implementation time frame of three to four years.

Morgan Stanley agrees the company has been operating in an almost perfect environment over recent months, with a strong housing market and the government tax incentives, but wants more evidence that the new Home store format works. Hence, while the share price may experience some near-term upside, the broker considers a long-term Equal-weight rating is appropriate.

FNArena's database has no Buy ratings now, with seven Hold and just one Sell (Citi). The consensus target is $20.70, suggesting 2.2% upside to the last share price. This compares with $18.74 ahead of the results. Targets range from $18.20 (Citi) to $22.33 (Morgans). The dividend yield on FY16 and FY17 forecasts is 4.6% and 4.8% respectively.
 

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