Small Caps | Nov 11 2011
– Breville facing tough domestic market conditions
– Overseas operations offer growth potential
– Moelis sees value at current levels
By Chris Shaw
Annual general meeting commentary from management at Breville ((BRG)) offered no specific earnings guidance for the coming year, which was no great surprise to stock broker Moelis given the importance of the upcoming Christmas trading period for 1H12 and full year earnings.
Breville, which imports and distributes electrical consumer products both in Australia and in a number of overseas markets, has had to deal with an uncertain macro environment and weak consumer sentiment for some time. Despite this, management has indicated sales for the year to date have been consistent with expectations.
This means Moelis has made no changes to its earnings per share (EPS) forecasts for Breville, which stand at 29.2c for FY12 and 32.6c for FY13. This suggests solid growth from the 27.2c achieved in FY11, which itself was an increase of 25% from the previous corresponding period.
Moelis's EPS forecasts compare to consensus estimates according to the FNArena database of 29.6c for FY12 and 31.4c for FY13.
Despite the difficult operating conditions in Breville's markets, Moelis sees some opportunities. In particular, a now entrenched footprint in the US high-end electrical appliance market offers solid growth potential.
Moelis estimates Breville now has a 10% share of the niche top-end market segment in the US, thanks to around 20 specialty and department store retail customers. Moelis expects the US market can deliver sustainable 10-15% in annual constant currency revenue gains over the next 10 years.
The US operation highlights the fact growth is coming from Breville's International division, which accounted for 63% of group earnings in FY11. This division delivered sales growth of 3.5% in Australian dollar terms and by 14% on a constant currency basis in FY11, while margins expanded to 18.7% from 14.2% previously.
As Moelis points out, this improvement reflected a combination of strong consumer acceptance of new products, an increased distribution footprint and entry by Breville into new product categories.
In contrast, Moelis notes the going was tougher for the Domestic Electricals division, this given some Australian dollar driven deflationary pressures and market share losses by the core Kambrook brand. The result was a 3.5% fall in sales and a 7% decline in EBITDA (earnings before interest, tax, depreciation and amortisation).
The earnings growth potential from the US operations leads Moelis to suggest Breville Group shares continue to offer value at current levels, this despite a 9% increase in the share price over the course of 2011 to date.
Trading on a FY12 earnings multiple of 10 times for FY12 on Moelis's numbers, the broker sees enough value to rate the stock as a Buy. Others in the market agree, as the FNArena database shows all three brokers to cover Breville rate the company as a Buy.
Macquarie is one of those positive on the stock and offers a similar argument to Moelis, pointing out the growth potential of Breville's overseas operations is enough to justify a positive rating even given tougher domestic market conditions. The consensus price target according to the database is $3.47, broadly in line with the $3.40 target of Moelis.
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