FY18 result in line; revenue +10%; EBITDA +20%
Beacon Lighting (BLX) FY18 result showcased a strong return to growth. Key highlights included:
- revenue +10% (1.6% like-for-like sales growth or 4.4% excluding cannibalised sales); 6 new stores; and annualisation of rollout in FY17;
- Gross Profit growth (+13.8%) – nicely outpacing revenue growth with 230bp of Gross Margin expansion (less requirement for discounting vs the Masters-impacted previous corresponding period, FX tailwind and product development/innovation); and
- an increase in opex (+70bp) reflecting continued up-front investment in stores and the emerging businesses ahead of full contribution and increased power costs.
Gross Margin strength the highlight; looking for a return to opex leverage
We believe that a decent portion of the GM drivers in FY18 can persist into FY19 – less requirement for discounting, product development/innovation (c20% of product refreshed per annum) while the recent step-down in the AUD should lead to a modest headwind in the back-end of FY19 (well hedged for c10 months of FY19).
After three halves of operating cost deleverage, FY19 should see a return to opex leverage (somewhat depending on like-for-like sales growth), as the large number of stores opening in recent years mature and the emerging businesses start to contribute.
FY19 forecasts – we forecast 10% EBITDA growth
Our FY19 forecasts are underpinned by the following assumptions:
- 1.8% like-for-like sales growth;
- 5 new stores;
- a 65.3% Gross Margin (-42bp on FY17); and
- 63bp of opex leverage.
This translates to 10% EBITDA growth; 9.6% EBIT growth and 10.8% NPAT growth.
BLX noted that like-for-like sales growth FY19-to-date is flat, however we highlight that the group is cycling its strongest comp of the year (August 2017) and is still being impacted by sales cannibalisation (should moderate during FY19). The maturation of the fleet of stores opened in recent years should also bolster top-line growth in coming periods as they enter the fastest growth period of their maturity cycle.
We believe investors will continue to enjoy the benefits from BLX's decision to accelerate its market position at the expense of short-term sales/profits in coming years as these stores mature over the typical 6-year life cycle. We acknowledge the softening housing market, however BLX's product development innovation, exposure to renovation activity and market share opportunity should provide a buffer.
Key risks include consumer spending slow-down, materially lower AUD, increased competition and a material housing market correction.
We increase our share price target and retain our Add recommendation.
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