Breville’s Replacement Cycle Tailwind

This story features HARVEY NORMAN HOLDINGS LIMITED. For more info SHARE ANALYSIS: HVN

After materially raising targets for Breville Group following FY24 results, brokers contemplate further upside from the replacement cycle and ongoing outperformance relative to peers.

-Breville Group main beneficiary of replacement cycle, says Jarden
-Ongoing outperformance versus Macquarie’s kitchen benchmark
-The impact of several new entrants in espresso coffee
-Broker views on FY24 results and the outlook

By Mark Woodruff

Throughout the pandemic, the installed base of home appliances lifted by 4-5%, according to leading global manufacturer, Whirlpool, with the uplift higher across small appliances and PCs.

Importantly, notes Jarden, usage of the higher installed base remains high, with Whirlpool estimating appliance usage generally is around twice the pre-covid level.

For this higher installed base, the greatest beneficiary of the replacement cycle on the ASX should be Breville Group BRG)), suggests the broker, which is already benefiting from new product development and geographical expansion.

As covid is now around four years in the past, Jarden believes we are entering a more material portion of the replacement cycle, which could drive upside demand for listed electronics retailers.

The analysts suggest both Breville and Harvey Norman ((HVN)) are the best way on the local stock exchange to play this replacement cycle, due to attractive multiples, large skews to IT, and high levels of operating leverage.

Potentially creating more certainty in investor’s minds for Breville, the group has outperformed the Macquarie Kitchen Benchmark over the period 2018-2023 by around 12% per annum.

This measure extends across the small appliance market, covering the coffee, kitchen and food preparation categories.

Breville’s distribution model is predominantly direct in North America and the EMEA region, whereas in the APAC region there is a greater reliance on third-party distribution, outside Australia, New Zealand and South Korea.

Designing and developing small electrical appliances, the group operates through the Global Product and Distribution segments.

The Global Product segment sells premium products designed and developed by Breville that may be sold directly or through third parties. Products are branded Breville, Sage, Lelit or may carry a third-party brand.

The Distribution segment markets products that are designed and developed by a third party which may be sold under a brand owned by the company, like Breville or Kambrook, or may be distributed under a third-party brand, like Nespresso.

In the first half of June Breville achieved double-digit growth in North America and EMEA regions, as well as in the Coffee segment. The company’s second half revenue grew by 5.7% during a period when the benchmark second quarter revenue fell by -1.1% year-on-year.

Globally, Macquarie observes only Breville, Nespresso and SharkNinja among its benchmark companies are generating revenue above pandemic peaks (with each overweight coffee) by developing new markets and investing in new product development.

Regarding competition, Morgan Stanley recently noted there been several new entrants in espresso coffee in 2024 including KitchenAid, SharkNinja and Phillips.

The analysts see limited impact in the near-term given these brands are more mass market by comparison to Breville’s premium status.

For the longer-term, there could be a positive impact from higher espresso coffee penetration, as these competitors increase overall marketing spend and raise awareness for the category.

FY24 results and the outlook

Slightly above the mid-point of management’s guidance range, Breville’s FY24 EBIT of $185.7m was broadly in line with Petra Capital’s forecast, and the broker’s target was raised to $28.30 from $24.40, though the rating was downgraded to Sell from Hold

This broker still had a positive view on Breville and felt the company has a significant growth runway, but the price earnings multiple had expanded towards the top-end of its range and was seen as excessive considering the backdrop of consumer and geopolitical risks.

At the time, Goldman Sachs (Neutral) agreed with Petra Capital on valuation (though structurally positive in the long-term), noting near-term growth expectations were more modest and suggesting the current share price reflected the underlying growth profile of the business.

While the result improved confidence by UBS (Neutral) for an expected revenue acceleration in FY25, the analysts also felt this outcome was reflected in the stock price.

On the other hand, analyst at Overweight-rated Wilsons highlighted a buffer against further shocks to consumer confidence from rising market share in the Americas (the company’s largest geographical market). Overall, this broker welcomed the second half return to double-digit growth in the Americas and EMEA.

Overall, Morgans (Hold and hoping for a share price pullback) considered the FY24 result was “impressive”, underscored by strong operating cash flow, an improved inventory position, and ongoing momentum into FY25.

A key highlight from FY24 results for Ord Minnett was the significant improvement in Breville’s financial position, which provides firepower for new product development, geographic expansion and potentially acquisitions.

Of the five covering brokers daily monitored in the FNArena database, three have Buy (or equivalent) ratings, while UBS and Morgans are on Hold.

The average target price of $33.17 is below the current share price.

Outside of daily coverage, Wilsons and Goldman Sachs are at Buy (or equivalent), while Jarden and Petra Capital have respective ratings of Hold and a Sell. The average target of these four is $30.93.

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.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms