A ripe market share opportunity
BBN's four largest competitors exited the market during FY18. BBN estimates these chains comprised A$138m of revenue, representing c45% of BBN's FY18 revenue and thereby creating a considerable market share opportunity for the group.
We think BBN is now well placed to emerge as a real category killer, with 20% market share (vs 12.6% currently) not out of the question (similar to base case market share for other category killers). This would equate to c60% revenue upside from FY18 levels (without assuming any market growth).
At 30 June BBN had 48 stores, well ahead of its now next largest competitor with 3 stores. DDS' have also shrunk their baby goods offering in recent years leaving online only players as BBN's main competitors going forward (although highly reliant on inventory from third part retailers).
Store maturity will see margins rise (excl. any opex leverage)
BBN stores historically take 4 years to mature and have stronger comparable store sales growth in the first 4 years of operation. c50% of BBN's stores are <4 years of age. Based on our analysis, store EBITDA margins should naturally lift from 11% to 14% by FY24 (before allocating corporate overheads or allowing for any natural opex leverage).
This provides some confidence in BBN's long term EBITDA margin target of 10% vs the 6.1% achieved in FY18. We think BBN's online sales can grow by at least another 30% in FY19 – at this growth rate, online sales should contribute c2.8% of BBN's SSS growth alone in FY19.
Listed comp bounce back performance provides confidence
In the report (Morgans clients can log in to access) we take a look at the recent margin performance of listed specialty peers. We focus on Lovisa, Adairs and Beacon Lighting – all of whom have experienced a period of margin volatility due to either internal execution issues (LOV, ADH) or market consolidation (BLX – Masters exit).
The analysis shows how quickly margins bounce back in the following two years. It also shows that the margins in the following year (post issue), do not quite reach the peak of the 12 months prior to the issue, with the exception of LOV where margins reached a new peak.
We forecast BBN's FY19 EBITDA margin to increase to 7.0%, up from 6.1% in FY18 but still well below the 8.3% margin delivered in FY17 and 7.9% in FY16. Indeed our FY19 forecast is roughly equivalent to the 6.9% EBITDA margin delivered back in FY15. This is behind the margin recovery rates of LOV, ADH and BLX, further highlight the upside potential.
Paying up for a multi-year earnings 'catch-up'
While BBN doesn't appear 'cheap' on 22x FY19F, we think this is more than justified given we are at the start of what is likely to be a multi-year earnings recovery (we forecast 28.5% 3-yr EBITDA CAGR).
We maintain our Add recommendation with a revised share price target (Morgans clients can log in to view).
Morgans clients can login to view our detailed report and increased share price target for Baby Bunting Group (BBN). Alternatively, please contact your nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
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