Australia | Mar 21 2013
-Keurig distribution to end
-Growth potential still strong
-UK a key market going forward
By Eva Brocklehurst
Appliance manufacturer Breville Group ((BRG)) has confirmed the Keurig brand distribution agreement in Canada will cease from June 2013. The company had flagged the possibility at the time of the first half results and, for brokers, the confirmation removes an uncertainty and they can get down to evaluating the company's trajectory. Brokers find growth potential greatest in the US and Asia as well as the UK. Home base Australia is likely to be more modest.
On the back of the announcement, Macquarie expects Breville to take a restructuring provision in the second half and scale down the Canadian infrastructure over the coming year to fit with the remaining Breville electrical business. The question will be how much of the operating cost infrastructure was shared with the existing Canadian operations and what can be eliminated. Macquarie is upbeat about the Keurig loss, believing the remaining earnings streams from the Breville brand are of higher quality. The broker flags the strong growth prospects in the US and solid sales in Asia and Europe. Moreover, the company will launch the new Nespresso range in mid 2013.
Goldman Sachs has downgraded earnings forecast to take into account the loss of Keurig revenue and the reduction in scale in the Canadian operations. This is offset by a rise in the price/earnings premium the company has to the broker's small industrials coverage. Goldman believes the removal of uncertainty over Keurig will actually result in a higher P/E rating for the stock. Strong growth in underlying earnings, favourable international prospects and a healthy balance sheet means the broker is not bothered by the loss of the Keurig revenue.
For CIMB the stock continues to offer reasonable value given the growth proposition is market penetration rather than overall system growth. The broker flags a net cash balance of $50m by the end of FY14 and wonders whether capital management is a possibility, should the share price remain at current levels. A buy back of up to 5% of share on issue at the current price could cost the company $35m and still leave the balance sheet debt free.
One thing the broker does foresee is that there are trailing overheads unaccounted for from the Keurig closure and these could take six to 12 months to eliminate. CIMB has allowed for $6m in trailing costs. Despite gaining market share and signs of an improving operating environment, CIMB has factored in only modest top line growth in Australia, about 2-3% for FY13-14 with a slight margin decline, despite Breville edging away form the competitive low end of the market.
UBS had already adjusted forecasts for the Keurig loss scenario and has reduced North American earnings forecasts by 22% for FY14. While the news of potential one-off costs with the Canadian restructure could still impact sentiment, the broker hastens to add the company still has significant growth potential internationally. UBS is yet to add in value for the UK opportunity, which should be launched in three months.
Breville intends to launch a premium range into the UK market, starting with 17 high-end units under an alternative brand. UBS notes critical mass could take some time but there is no reason why the region could not be a meaningful contributor to the company's business. The broker envisages that, should UK penetration reach just one fifth of that in Australia, Breville's earnings would be raised by 6%, assuming similar 10% margins. This is the story the broker expects investors to focus on going forward. On this rests the broker's Buy rating.
On the FNArena database there are three Buys and one Hold for Breville. The stock carries a dividend yield of 4.9% on FY13 consensus forecasts. The consensus target is $6.12, from a tight range of $6 to $6.30, with 12.7% upside suggested to the last share price.
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