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Breville: Building Platform For Future Growth

Australia | Aug 25 2023

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

Longer term the positive investment thesis for Breville Group revolves around the company building a platform for high growth in future years.

-Net profit rises 4.2% to $110.2m in FY23
-Lower freight costs boost profitability
-Roll out of Breville products into US Target stories to support earnings
-Espresso coffee machines sales add to earnings momentum

New products and geographic expansion to drive growth

By Nicki Bourlioufas

Breville Group ((BRG)) is expected to maintain wide margins with regional expansion, new products launches and cost reductions supporting its profitability in FY24, along with sales of the popular Nespresso coffee machines it distributes. However, higher interest rates and slowing economic growth could weigh on sales, which remains a key risk, analysts say.

The company reported total revenue in FY23 of $1.48bn, increasing 4.2% from the previous fiscal year. Breville’s net profit after tax (NPAT) also rose 4.2% to $110.2m. Gross margins expanded to 35.0%, up from 34.3% in 2021-22.

Breville Group CEO Jim Clayton said solid sales enabled the company to deliver on its earnings guidance against a challenging and backdrop of subdued consumer demand, in the face of higher interest rates and inflation.

Ord Minnett is one of the most optimistic brokers post the result, noting the rollout of Breville products into 1,000 US Target stores could offset the negative effects of Bed Bath & Beyond's closure in coming quarters.

Greater organic sales growth through geographic expansion and new product development will also support increased market penetration and earnings. “Breville has built a platform to achieve significant growth in future years,” the broker concludes. Ord Minnett has retained its Buy rating with a 12-month price target of $27.00.

Lower freight and product costs will also help gross margins. The broker was also impressed by the outcome for the Americas and APAC divisions, which delivered sales growth of 15.9% and 5.0%, respectively.

Even more positive is Morgan Stanley which has a $29 price target on the stock. Morgan Stanley believes the company is close to achieving a more positive earning base after multiple years of covid and macro-economic distortions.

This broker expects earnings growth to accelerate with new country product launches in Asia, market share gains and a potentially improving macroeconomic environment.  Margins will also be protected by slowing reinvestment.

UBS has a Buy rating on Breville and a $28.60 target price. New product launches, strong US Prime Day sales in July and robust growth in new markets are all expected to support earnings in FY24. New distribution deals signed in China and Indonesia and particularly strong growth in South Korea also impressed UBS, on top of the rollout of Breville products in around 1,000 US target stores.

In the Asia Pacific region, Breville trades under its company owned brands, Breville, Baratza, Kambrook and Lelit branded products and it also distributes products under a machine partnership with Nespresso.

In the Americas, the group markets and distributes Breville, Baratza and Lelit branded products and distributes Nespresso products. In early FY24, Breville branded products will also be made available to specialty coffee retailers in the US through a new B2B portal, widening Breville’s channel footprint in coffee.

In Europe, Middle East, and Africa (EMEA), the group markets and distributes Breville designed products under the company owned brands Sage, Baratza, Lelit and Breville in selected markets.

Given continued momentum in the global product segment, Wilsons believes the company's gross margins should continue to improve, backed by the continual launch of new products. Wilsons has a target price on the stock of $25.70.

A more moderate voice comes from Goldman Sachs. While Australia’s love of espresso coffee is helping drive demand for Breville coffee machines, along with the company’s “advantaged positioning” in that segment, Goldman believes the company's shares are already fully valued.

Goldman Sachs notes Breville’s price-earnings ratio for FY24 is 29.1x, which is considered expensive versus other consumer brands it covers. This broker has a more modest price target of $23.50 and a Neutral recommendation.

Jarden sides with the more moderate view, cutting Breville sales forecasts by around -3% for the two years ahead and its net profit forecasts by around -2% to reflect higher depreciation associated with new warehouses on top of a more cautious view on economic growth and overall weaker demand for Nespresso machines.

Jarden has a Neutral rating on Breville and a $23.80 target price. “Macro headwinds remain, and, in our view, this will constrain upside risk into FY24. We push out the pace of macro recovery by six months,” Jarden said.

Morgans is also cautious on Breville, shown through a Hold recommendation and a target price of $25.00. This broker expects demand to remain subdued by historic standards because of weaker consumer confidence and discretionary spending. The exposure to the housing cycle is also expected to weigh on earnings.

Despite slowing discretionary consumer spending, Breville shares have made strong gains in 2023, in excess of 30% year to date, whereas the ASX/S&P200’s made hardly any sustainable progress ex dividends.

FNArena's consensus target price for Breville is $26.40, suggesting 4.3% upside to the last share price. This consensus target is derived from the six brokers monitored daily, though Shaw and Partners has as yet not updated post FY23 release.

Jarden and Goldman Sachs are not part of the select group of daily monitored brokers in Australia.

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