Australia | Mar 15 2012
– Goldman Sachs upgrades to Buy rating on Breville
– Broker attracted to growth potential from international operations
– Sees value and an attractive yield at current levels
By Chris Shaw
Breville Group ((BRG)) last month delivered a strong interim earnings result, one that saw both UBS and Credit Suisse lift their price targets for the stock while retaining Buy ratings. Today Goldman Sachs has turned similarly positive, lifting its target and upgrading its rating on Breville to Buy from Hold.
The driver of the more positive view of Goldman Sachs is the international operations of Breville, which accounted for 69% of group EBIT (earnings before interest and tax) in the first half of FY12. North America makes up the largest component of the international business, accounting for 51% of group EBIT in the period.
In terms of the North American market, Goldman Sachs sees scope for Breville to double sales over the longer-term. This should come primarily via expansion, as the group achieves greater penetration and opens more stores. New product categories such as the Breville Mini Smart Oven should also deliver some growth in coming years.
A focus on high product quality, product innovation and limited distribution sets Breville up well to win market share in the view of Goldman Sachs, especially as market positioning is different to that of competitors and should prove supportive to margins.
International distribution earnings should also recover in 2H12 thanks to a stronger forward order book and expansion into new regions, which supports the outlook for the international business overall.
In Australia the outlook is for lower earnings growth but Goldman Sachs points out the domestic business will at least be cycling a low base of earnings and there will be benefits from new products and some cost cutting. As well, the Australian business has already felt the full impact of reduced sales to Kmart.
An additional positive for Breville in the view of Goldman Sachs is a strong balance sheet, as the company had net cash of $23.6 million at the end of the December half year. These funds could be used for either expansion initiatives or capital management, something the broker notes should benefit shareholders in either case.
To reflect stronger international growth expectations Goldman Sachs has followed the lead of the other brokers covering Breville and lifted its earnings per share (EPS) forecasts modestly. Estimates now stand at 32.3c this year and 37c in FY13, which compares to consensus EPS forecasts according to the FNArena database of 32.3c and 34.6c respectively.
Movements in market multiples and a reduction in the relative discount to the Small Industrials earnings multiple sees Goldman Sachs lift its price target for Breville to $4.20 from $3.60. This puts the broker above price targets in the FNArena database, which range from Macquarie at $4.10 to Credit Suisse at $3.80.
On the numbers of Goldman Sachs, Breville is trading on a FY13 earnings multiple of 9.7 times while offering a yield of 6.7%, both of which are regarded as attractive. Dividends should be fully franked at least through FY13.
Macquarie's Buy rating on Breville is based on similar reasoning to that of Goldman Sachs in that growth in international operations and a strong brand suggest the stock is undervalued at current levels. As a reflection of this Macquarie lifted earnings estimates slightly earlier this week, though there was no change in the broker's price target.
Breville shares closed yesterday at $3.60, which compares to a trading range over the past year of $2.51 to $3.67. The latest share price implies upside relative to the $3.97 consensus price target in the FNArena database of around 10%.
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