Can JB Hi-Fi’s Momentum Stretch Beyond Xmas?

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

-Stock undervalued for Credit Suisse
-Costs growth unclear
-Low-margin categories improve
-Citi considers outlook remains poor
 

By Eva Brocklehurst

JB Hi-Fi ((JBH)) provided much needed relief for brokers with its AGM update, signalling sales trends have ratcheted up a gear from the very weak conditions at the start of the financial year. FY15 sales guidance implies 3.0% year-on-year growth.

The stock has now sold down to a level which is too low to ignore, in Credit Suisse's view. The recent improvement in trading conditions should continue and the broker observes the shares offer significant relative value to the ASX200 and global peers. The stock is trading at a once-in-a decade discount of 15%, despite the unchanged investment proposition. Like-for-like sales declines of 2.1% in the year to date represent a significant improvement on the rate of decline, 5.5%, reported in July.

Moreover, there is additional upside to sales and gross profit from a depreciation in the Australian dollar. All this adds up to a compelling valuation in Credit Suisse's view, hence, an upgrade to Outperform from Neutral. UBS continues to forecast first half margin compression and expects profit to be flat before improving in the second half. While there were periods of increased promotional activity UBS observes it was rational. The biggest opportunity for expanding gross margins comes in lifting penetration in higher margin appliances via the home segment as well as accessories, in the broker's opinion. Still, the improvement from the start of the financial year is marked and there has been no major change in promotional activity so for UBS the trading update was a positive. 

JP Morgan is not so convinced. The broker makes a case for downgrading the stock to Neutral from Overweight, with operating costs and capex expected to rise and gross margins expected to remain in line rather than expand. There is a risk the cost of doing business will rise because of growth plans in newer categories. The broker could become more constructive on the stock when the extent of cost growth is clearer and the share price is more attractive against valuation.

Like-for-like sales may still be down to date but Deutsche Bank expects the company can achieve its FY15 guidance. This broker is also concerned about the lack of commentary on gross margins and suspects the market expectations for gross margin improvement may not be met, as sales are being driven by low-margin categories. Industry feedback suggests promotional activity in IT segments has been benign but Deutsche Bank is concerned that excess inventory may prompt aggressive discounting in this category. FY15 capex guidance is $50-55m, which represents an increase of 39-53% year on year, largely driven by the roll out of the home category.

Morgan Stanley expects that, as a greater number of games are released, the sales trajectory will remain solid. This category represents 17% of the company's sales. The issues surrounding tablets is largely over, with the prior period (to July) heavily impacted by weaker tablet sales and low confidence.

The good news was only on the surface, in Citi's opinion, with the company sacrificing gross margin to achieve better sales. The broker is not buying the improvement story, expecting the trends will peter out beyond Christmas, given the product pipeline is weak. The drivers of improved sales were iPhone 6, Surface Pro 3 and games consoles, all low margin products. Moreover, new store growth is likely to be low with the broker forecasting new store sales growth of 2.6% in FY15. Comparable store sales need to rise 1% to meet guidance and Citi considers the outlook is poor for the next 18 months.

FNArena's database contains four Buy, three Hold and one Sell ratings. Consensus target is $18.14, suggesting 15.0% upside to the last share price. This compares with $18.61 ahead of the update. Targets range from $15.10 (Citi) to $20.30 (UBS). Dividend yield on FY15 and FY16 is 5.4% and 5.7% respectively.

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