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Breville Promises (Lots Of) Growth

Australia | Feb 18 2022

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

Strong sales growth and price increases offsetting retail sector pressures have seen Breville Group deliver a strong first half result, and all signs point to momentum continuing into the second.

-Breville Group has backed up above-average growth in FY21 with double digit sales growth in the first half of FY22
-Investment in market expansion and inventory build supports a positive outlook for the coming half
-Stock price premium compared to peers is justified according to analyst commentary

By Danielle Austin

A strong first half result has the market excited to see what Breville Group ((BRG)) achieves in the second half. The company delivered an impressive first half result, reporting a 24% year-on-year sales increase, cycling off 39.2% sales growth in the previous comparable period, and a 23% earnings increase.

The notable strong sales performance was a driver of results, with the company reporting double digit growth across all segments. Geographically, Australia Pacific sales were up 22% year-on-year, North America was up 17%, and Europe was up 39%.

The particularly strong result from Europe was bolstered by recent entry into the France, Italy and Portugal markets. Notably, results were achieved amid a turbulent backdrop of freight and cost increases placing pressure on margins which the company largely mitigated through price increases.

On a full year basis, market consensus points to earnings of around $156m, implying a higher second half skew of 72% compared to a 69% skew last year.

Big things to come in second half

The company has indicated a big second half, particularly with its announcement that it expects to enter new geographies before the end of the financial year, with some analysts predicting Asia to be a likely target. The company has held off on new market expansion for the past 12-18 months given the strong demand for its products but is ready to pursue geographic growth in coming months.

New markets don’t appear to be currently priced in the company’s share price, so a successful launch in a new geography could offer upside. Market experts have suggested market share growth, particularly in new geographies, could support consistent double-digit sales growth for the next few years. The company also has further expansion opportunity in Europe, with the region currently offering a more limited product range than North America and Australia.

The company has also guided to a continued commitment to accelerated inventory build and to carry higher inventory until supply chains become more predictable. Following impacts from supply chain constraints in the previous year, the company largely rebuilt depleted inventory levels in the first half but will continue to invest in inventory build, which should help the company alleviate potential supply pressure moving forward. The Americas was most impacted by supply constraints in the first half, and sales growth in the region should benefit in the second half.

While the strategy will weigh on free cash flow, market consensus is that given supply chain pressures now is not the time to prioritise conserving working capital. The company closed out the first quarter with an inventory level of $293m but some analysts are expecting that to increase to $322m by the end of the financial year.

Finally, expect new product launches in the second half, and likely through to FY24, following several years of research and development, as well as increased marketing spend.

Of the six brokers in FNArena’s coverage currently rated on Breville Group, five hold a (Speculative) Buy rating or equivalent with one Hold rated. The target price average among these brokers is $33.03.

The stock does trade around 119% above its peer average, but analysts from UBS note the high quality of the stock and its attractive growth profile justify a premium. The broker is Buy rated on Breville Group with a target price of $34.00.

Morgan Stanley, who retained an Overweight rating and target price of $36.00 following Breville's first half results release, warns that industry growth should normalise back to low single-digit growth at some point, although notes the company appears able to continue to outgrow the industry in the medium term.

Ord Minnett finds the company well placed for significant growth in future years, supported by a global platform. The broker increased earnings per share forecasts 4.1%, 5.6% and 7.5% through to FY24 following the company’s results release and upgraded its rating to Buy from Hold and its target price to $33.00 from $30.50.

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