Risks Seen To The Upside For JB Hi-Fi

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

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

JB Hi-Fi posted accelerating sales growth in its core business in the March quarter. Meanwhile, CEO of The Good Guys will leave at the end of April, to be replaced by a former JB Hi-Fi CEO.

-Momentum considered sustainable while guidance confirmed and risks envisaged to the upside
-Amazon not expected to weigh on earnings for some time
-Terry Smart as CEO of The Good Guys considered a positive move
 

By Eva Brocklehurst

Electronics retailer JB Hi-Fi ((JBH)) posted accelerating sales growth in its main business in the March quarter, above expectations, while sales growth for newly-acquired The Good Guys slowed, as was generally expected.

UBS observes the company has sustained momentum and market share gains in what appears to be an increasingly rational industry. The broker believes guidance is conservative, in that it implies second half sales growth of 8% versus the current 11% run rate.

The broker remains comfortable with forecasts slightly ahead of guidance and envisages upside to both FY17 and FY18 estimates if momentum can be maintained.

The business is one of the best consumer electronics retail models globally, in the broker's view, featuring high levels of productivity, lower costs and a strategy that aims to deliver the best value for consumers while maximising gross margins.

March quarter like-for-like sales for JB Hi-Fi grew 8.2% and total sales grew 10.8%. This is an acceleration from the 7.2% like-for-like and 9.8% total sales growth reported in January. The Good Guys posted 1.2% like-for-like sales growth in the quarter and 2.6% total sales growth. This is a slowdown from January when like-for-like sales growth was 3.5% and total growth 5.0%.

Industry checks by Deutsche Bank suggest January's strength for The Good Guys was boosted by unusually strong sales of cooling products. Assuming January is a larger sales month versus February and March – the broker estimates January was 20% larger – this implies February-March growth was probably flat and in line with guidance.

The Good Guys was a little weaker than Morgan Stanley expected but given poorer March weather and the disruption of the merger, the broker believes this is explainable. Ord Minnett suggests weakness highlights the execution risk following the conversion to corporate from joint-venture stores and a significant change in store personnel.

Previous guidance for 2017 total sales of $5.58bn and net profit of $200-206m has been reaffirmed. This signals to Ord Minnet there is little change likely at the upcoming investor conference.

The broker retains a view the risk to FY17 net profit is skewed to the upside and now becomes more probable, given the March quarter result. Nevertheless, the June quarter is the main quarter for the second half. The broker currently forecasts net profit to be above the top end of guidance.

Sales guidance is looking increasingly conservative to Morgans too, while guidance for The Good Guys is more realistic. Guidance implies 9.5% sales growth, on the broker's estimates, and, as Dick Smith left the electronics market back in April 2016, comparables may moderate from this point.

Citi believes the company is outperforming the broader industry and retains a clear preference for JB Hi-Fi over Harvey Norman ((HVN)), given the former's execution on operations and strong momentum in the core business.

Although the stock appears cheap on a price/earnings multiple basis the broker acknowledges risks to earnings in the medium term. These include a slowing in retail spending, increased competition, price inflation and the threat of new entrants.

Amazon

Amazon remains a concern for brokers with its mooted entry into Australia but is unlikely to weigh on the company's earnings for some time, in Deutsche Bank's view, given Amazon will need to ramp up. In the short term the consumer and electronics product cycle, a key driver of sales, is supportive as significant phone and gaming console releases are imminent.

While the threat of Amazon cannot be underestimated, UBS believes JB Hi-Fi is better equipped to mitigate the impact relative to offshore peers such as Best Buy.

Despite the recent de-rating and reasonable fundamentals, Morgans retains a Hold rating, largely because of the threat of Amazon's entry to the local market. That said, the broker expects the company to be reasonably well positioned to compete via a, now, more powerful global sourcing position.

The Good Guys CEO

Michael Ford has resigned as CEO of The Good Guys and will be succeeded by Terry Smart, who was previously CEO of JB Hi-Fi back in 2010-14. Michael Ford's departure, while a little earlier than expected, is not a surprise to most brokers.

Some uncertainty is expected to ensue in the business as it undergoes changes, although the return of Terry Smart suggests a known quantity and fit with the culture of JB Hi-Fi.

Ord Minnett considers the appointment of Terry Smart a significant positive, bringing back one of the best electrical retailers in Australia. Moreover, the broker believes he understands the distinctive features of The Good Guys and how this business can be enhanced and pursued.

The broker also believes The Good Guys provides a more capable competitor to Harvey Norman. Any improvement under Terry Smart, especially an effort to become a more premium business and make The Good Guys a location where suppliers can launch new products, would be a negative for Harvey Norman, in the broker's opinion.

On FNArena's database the consensus target is $30.28, suggesting 19.3% upside to the last share price. Targets range from $32.80 (Macquarie) to $26.49 (Credit Suisse). The dividend yield on FY17 and FY18 forecasts is 4.7% and 5.3% respectively. There are three Buy recommendations, four Hold and one Sell (Credit Suisse, yet to update on the quarterly sales).
 

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