About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Former Senior Analyst
- Date posted:
- 15 November 2016, 1:36 PM
- Sectors Covered:
- Consumer Discretionary (Retail)
- At its recent AGM, Beacon Lighting (BLX) noted it was "closely monitoring" the actions of Masters as it exits the market.
- We envisage a reasonably soft 1H result from BLX, but for the 2H to show strong improvement with Masters having exited the market by the end of November.
- This tailwind should persist into FY18, a year where the store rollout is also likely to accelerate.
1H result likely to be soft
We expect BLX's 1H17 result will likely be impacted by the following headwinds:
- soft like-for-like (LFL) sales growth due to Masters' aggressive clearance activity as it exits the market in late November;
- a lower Gross Margin in response to the lower AUD/hedge rate and an inflated pcp; and
- lower operating cost leverage on a more subdued LFL sales outcome.
The above should be partially offset by the acquisition of three franchise stores in 1H17 (in addition to two new corporate stores already opened). The date of the Masters exit was announced post BLX's FY16 result in late August. With just three key large competitors in the broader lighting/fan sector in Australia (Bunnings, Masters and Beacon) and one irrational player exiting the market, we certainly expect BLX will see a decent short-term impact on its LFL sales growth in September-November (as it did during 2H16).
A bounce back is likely in the 2H
In contrast to the 1H, we see the likelihood of a much improved 2H, with 'clear air' following Masters exit. While it is unclear how much demand has been brought forward from Masters extensive clearance activity, we expect a reasonable tailwind will result following the extraction of one of three competitors from the market over time.
Store rollouts in FY18
Another consequence of the Masters' exit is the additional store rollout opportunities for the large format retail sector. BLX has lodged expressions of interest on a range of sites with Home Consortium. We forecast BLX will have c94 corporate stores by FY17-end (six new stores and three franchise acquisitions). We believe the company's corporate store rollout profile could ramp up to 8-12 stores in FY18 (vs c6 pa currently). This would result in 8.5%-12.8% corporate footprint growth in FY18, underpinning a stronger year of growth for the group. We await further guidance from BLX before factoring in any store rollout acceleration from FY18.
Hold on...outperformance to come post 1H17 result
Beacon Lighting (BLX) continues to boast a strong balance sheet, high ROE (>25%), industry-leading margins and strong cash flow generation.
The key risks include:
- a slow-down in general consumer spending;
- heightened competition;
- price deflation in core categories;
- unsuccessful pass-through of price increases in response to the lower AUD negatively impacting GP margins; and
- an inability to secure suitable sites hampering the store rollout.
Our EPS forecasts fall by 6.8% in FY17, 6% in FY18 and 5.7% in FY19 on the back of lower like-for-like sales, Gross Margin and operating leverage assumptions.
With the stock trading within 10% of our new share price target, we pull our rating back to Hold.
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Disclaimer(s): Analyst owns shares.
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