- Beacon Lighting's (BLX) FY17 result showed a return to growth in the 2H, despite absorbing materially higher opex associated with a record store rollout and new businesses.
- We believe the strategy was best described by BLX's chairman who stated : "the best time to win market share is when the market is difficult".
- The exit of a major competitor like Masters doesn't happen every year and the timing of BLX's investment ramp-up isn't coincidental.
- We think FY18 will see BLX return to delivering strong double-digit earnings growth.
FY17 result – a better 2H performance ex investment
BLX's FY17 result (EBITDA -5.4%) showed the lingering effects of a difficult 1H which was impacted by Masters' exit from the market. However the 2H returned to growth at all line items, despite absorbing a material opex increase relating to the record store rollout and new business acquisitions. LFL sales growth of 1.2% was evenly spread half-on-half. Stripping out the weak market in Western Australia (negative comps), like-for-like sales growth was 2.7% in the 2H. This is an important indicator in our view and shows some top-line reprieve following a pull-forward of demand during Masters' exit.
A big year of investment to underwrite future market share gains
The FY17 result showed a material step-up in opex which largely related to significant investment in new stores and businesses. The group opened 8 new company stores, bought back 4 franchise stores and acquired 4 new company stores which are in the process of being opened (opened post balance date but the cost absorbed in 2H17). This is a much larger store opening program than the company's typical 6 store rollout per annum. Given new stores typically contribute little in their first year, the incremental opex impost vs the previous corresponding period was significant (ie A$4.4m of expenses with only A$6.3m of sales). This headwind will turn into a tailwind in FY18 as this investment leverages a higher sales line.
Setting aside this operating cost, the company produced strong operating leverage on General & Administration (-90bp) despite a softer like-for-like outcome.
FY18 should see a return to strong growth
We note a few things in relation to FY18:
- Like-for-like sales growth and total sales growth should be higher than FY17 given the Masters exit will be fully cycled by end-Nov and the store rollout was back-loaded in FY17;
- The Gross Margin (GM) will rise in 1H18 (vs 1H17) but likely fall in 2H18 (vs 2H17), creating the likelihood of a relatively flat GM in FY18 (due to strong growth in emerging and new businesses which are lower margin);
- We should see lower opex, particularly in Selling and Distribution, as the FY17 investment leverages a stronger top-line outcome from the new stores contributing a full year.
With the above in mind, in addition to the store rollout guidance (6 stores + one franchise buyback), we forecast BLX to grow EBIT by 15.5% in FY18 without having to make any aggressive underlying assumptions. We note that we currently factor in very little for the recently acquired GE street lighting licence. With current tenders in the market, any success in key municipalities could be material to sales/earnings going forward.
We are sticking with experience and think Beacon Lighting (BLX) will return to delivering strong double-digit earnings growth in FY18.
Key risks include:
- slow-down in consumer spending;
- heightened competition;
- margin compression;
- inability to secure sites thus hampering the store rollout; and
- losses in the emerging businesses.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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