Re-Rating In View As Beacon Lighting Expands

This story features BEACON LIGHTING GROUP LIMITED. For more info SHARE ANALYSIS: BLX

For Beacon Lighting, enjoying a heightened domestic focus on housing, revenue upside revolves around the expanding trade and international business

-Buoyant housing market, low interest rates supporting Beacon Lighting sales
-Current mix towards trade/international could be a headwind to margins in the first half
-Is international expansion an underestimated opportunity?

By Eva Brocklehurst

Beacon Lighting ((BLX)) can outperform the discretionary retail sector because of the focus on housing, as consumers forced to stay home spend money on renovations. Moreover, residential construction is also robust.

Citi points out private dwelling approvals across Australia have been up 18% to June 2021, envisaging potential for the stock to outperform the discretionary retail sector because of the housing cycle and industry consolidation.

The strength of the company's FY21 results highlights the quality of its business model, in Jarden's view, as well as management's ability to manage its channel mix, pricing and costs. Net profit in FY21 was up 85% and slightly ahead of guidance.

Morgans believes macro factors in Australia will underpin demand for Beacon Lighting products in the years to come. Low interest-rate should support the buoyant housing market in the near term amid a reallocation of consumer expenditure domestically and away from overseas travel.

Nevertheless, Jarden, with an Overweight rating and $2.10 target, downgrades earnings estimates by -6.2% because of the lockdowns impacting on retail and trade in the first quarter of FY22. The company has pointed out July was more difficult than August in the current half, as August is cycling the Victorian lockdowns in 2020.

The broker had forecast like-for-like sales growth of 5% in the first half but now expects a contraction of -10%, yet expects sales will rebound swiftly when lockdowns end while the forward order book of 6-18 months provides great visibility from a trade sales perspective.

Citi forecasts first half like-for-like sales will decline by -15% because of the adverse impact of lockdowns on retail sales, while trade should improve when NSW construction activity returns to normal.

The company is unlikely to increase discounting as underlying demand remains strong, the broker suggests. Citi expects operating expenditure as a proportion of sales will increase in FY22 to 42.2% as The company steps up investment in marketing and launches the direct-to-consumer (DTC) website in the US.

Citi reiterates a Buy rating with a $2.35 target, anticipating a full year dividend of 6.5c in FY22, implying a payout of 57% that is consistent with a target of 50-60%.

Morgans upgrades to Add from Hold with a $2.30 target assessing the macro business for lighting is favourable, particularly in trade, while retail gross margins should hold up as there are no promotions and FX benefits.

Trade Versus Retail

The trade opportunity should be driven by marketing and trade specific products and Beacon is hoping for similar rates of growth in FY22, supported by the launch of its new trade loyalty club. Management has warned that as trade is performing relatively well compared with retail lockdowns, the current mix towards trade/international could be a headwind to margins in the first half.

Jarden estimates trade will have a gross margin around 50-55% and international 40-45%. Given the focus on international and trade, the broker, therefore, expects gross margins will slowly decline. 

Citi forecasts FY22 gross margins will decline to 67.6% from 68.4% because of higher freight costs and a greater proportion of sales from trade, yet points out this expansion will largely be using an existing fixed asset base. The company also has a growing property portfolio which presents development opportunities.

The trade business has potential to grow at a compound annual rate of nearly 30% over the next 3-5 years and Morgans suspects the market will be happy to attribute a higher multiple to trade earnings over time compared with retail.

The broker also assumes gross margins declined to 67.7% because of a weaker Australian dollar, leading to an earnings (EBIT) margin of 16.8%. The broker acknowledges its estimates could be wrong if Beacon s unable to sustain its momentum in trade, if lockdowns are prolonged or the expenditure on renovations in Australia reverses.

The company also has a growing property portfolio which presents development opportunities, with $40m in undrawn facilities that should enable the pursuit of property acquisitions, store roll-out and invest in the business.

International

Morgans takes exception to what it describes as "the moribund pace of growth” implied by consensus for FY23 and FY24, which does not account for the domestic macro environment and opportunities arising as the business pushes into the US and Chinese markets.

Jarden agrees international is a significant and underestimated opportunity, noting international sales increased 45.3% to $12.3m in FY21 amid the launch of the new DTC website in the US and strength in both the US and Hong Kong.

In explaining the earnings potential, Jarden points out, as a wholesaler, Beacon Lighting has very little incremental costs attached to sales growth and, although the cost base will rise in order to service new markets, incremental costs will still be marginal compared with the upside.

Jarden believes international could contribute around 10% to total gross profit by FY25 and could, with greater disclosure and understanding of the market, re-rate Beacon Lighting beyond an Australian-only lighting retailer.

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