Cups Overflow On Breville Strength

This story features BREVILLE GROUP LIMITED. For more info SHARE ANALYSIS: BRG

-Strong Aust growth in main brands
-UK Sage starts off well
-Growth despite margin contraction in America
 

By Eva Brocklehurst

Amid an earnings season beset by weak consumer confidence and retailer woes, Breville Group ((BRG)) has stood out. It is not often in the current climate that Australian operations are the highlight of the results. Even less so when it's consumer oriented merchandise. Breville hit the spot in this regard, as there was strong growth in both Breville and the discount Kambrook brands.

The small appliance manufacturer reported FY13 net profit of $49.7 million, up 8%, well ahead of guidance, and a final dividend of 12c. The results included $800,000 in restructure expense after the loss of the Keurig contract, and resulting from the downsizing of the Canadian operations, as well as $2m in start-up losses from the Sage brand launch in the UK. JP Morgan estimates a further $4m will be taken in costs in the next year.

North American margins are falling heading into FY14, with the loss of the Keurig distribution contract, but core revenue growth in the region remains strong, up 32% for FY13, and brokers see little cause for alarm. It may be early days for the UK business, having launched in May, but UBS also sees no reason why it won't be a success. The broker notes management commentary has been limited but early consumer reports and press coverage have been positive for the select items making up the Sage range.

More products are also rolling off the production line to assist growth in FY14, including the Oracle automatic manual coffee machine (automatic manual?). Yes, it's clever. There's also the QuickTouch microwave and the Crispy Crust pizza oven!

Macquarie notes the stock has rallied hard and is now above where it was before the loss of Keurig earnings. While Breville appears fully valued near term the broker was very encouraged by the strong momentum in international sales throughout FY13 and continues to believe in the international growth prospects of the brand. Macquarie also compares the result with competitor brand Sunbeam. The second half revenue growth of 8% and further margin expansion were in complete contrast to the performance of Sunbeam, which reported double digit sales and earnings declines. Breville has continued to outperform Sunbeam in the Australian market through its increased investment in its brand and growth in premium products. The Nespresso deal is expected to ramp up its contribution in the first half of FY14 after retailers run down existing ranges.

Breville is trading at a premium to small industrial peers at 17 times. While near-term upside is limited, valuation is justified, in UBS' view, given brand value, US momentum and the Asian and European opportunities. A Buy rating is therefore retained. In fact, on the FNArena database it's Buy nearly all the way. There are four Buy ratings and one Neutral (Credit Suisse, yet to update). The consensus target is $7.23, signalling 5.1% downside to the last share price. The target has moved from $7.11 ahead of the results. Targets range from $6.02 to $8.20.

UBS has raised earnings forecasts for FY14 by 0.4% and FY15/16 by 2.5%, largely the result of increased Australian/US revenue growth assumptions. Management has not provided guidance for FY14, but the broker expects more clarity on an earnings range later in the year. The results beat JP Morgan's forecasts. The broker has now included the UK in revenue growth assumptions, albeit conservatively, and expects 20% revenue growth over the next couple of years and similar earnings margins to North America ex Keurig (16%). JP Morgan maintains this is highly conservative if the success the company has had in North America is anything to go by.

Sounds good. Are there risks? Yes, Breville is attempting to start a new brand from the ground up in the UK but JP Morgan thinks the endorsement of Heston Blumenthal will be instrumental in smoothing the way. The UK retail market is lacklustre but then that has been the case for some time. In the two months since the business started revenue has equated to $2.1m. The company incurred $3.6m in start-up costs but JP Morgan observes it generated significant publicity and media support as a well as a strong backing from premium retailers.

Looking into FY14, the fall in the Australian dollar and the corresponding increase in production costs have the potential for a negative impact on margins. Given the large US dollar earnings and cash repatriated to Australia there is a partial natural hedge. The company has taken out forward cover for $30m of purchases at US95.5c which will afford time in which to adjust prices and ranges and minimise margin impact, in Macquarie's view.

See also, Breville Marked Up For Growth on June 14 2013
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms