JB Hi-Fi: Demand will normalise but perhaps not off a cliff

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
19 August 2020, 2:41 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • JB Hi-Fi-'s (ASX:JBH) result was in-line with sales/earnings guidance provided in mid-June, delivering very strong growth (2H NPAT +77% yoy). While no FY21 guidance was provided, July trading has accelerated further with JB Aust/TGG LFL sales >40%.
  • Strong cash conversion has seen material debt reductions, with the group exiting FY20 with A$252m net cash. This will normalise in FY21 as inventory right-sizes and payables come due. Despite this, we forecast JBH to be in a net cash position by FY22 (and therefore assume a higher dividend payout ratio in outer years).
  • Clearly these levels of growth cannot continue in perpetuity and we think the group's Remuneration report says it best: “...not yet clear whether much of FY20 revenue was a bring forward of some of what the group would normally sell in FY21”. That said, we remain confident in JBH's ability to grow post COVID volatility. Hold maintained (Morgans clients can login to view detailed reports and price targets).

FY20 result = 77% NPAT growth in the 2H

Jb Hi-Fi (ASX:JBH) reported a very strong result (slightly above the top-end of recently provided NPAT guidance), with significant 2H20 growth (NPAT +77%) due to COVID-19 consumer behaviour.

Key highlights:

  1. Sales +11.6% (+4%/21% 1H/2H)
  2. Gross profit +10.9% (+3.9%/19.3% 1H/2H)
  3. EBIT +30.5% (+8%/70% 1H/2H)
  4. NPAT +33% (+9%/77% 1H/2H)

Cash generation was very strong, with 180% gross cash flow conversion reflecting the stronger sales outcome/lower inventory.

This saw JBH exit FY20 with a A$252m net cash position, although this is expected to moderate as inventory/working capital normalises.

JBH declared a final dividend of 90cps (+77% yoy), taking the FY dividend to 189cps (+33%; 65% payout of normalised NPAT pre-AASB16).

Strong momentum continues into early FY21

JBH provided its typical total sales/LFL sales growth trading update for July, comprising:

  • JB Aust +42.1%/+44.2%
  • JB NZ +9.1%/+9.1%
  • TGG +40.4%/+40.4%

Clearly the group continues to benefit from current COVID-19 conditions, although this trading update does not reflect Melbourne/NZ closures in August given re-commencement of lockdown measures.

JBH noted that in August it has seen a significant acceleration in online sales in VIC which, combined with “continuing” sales momentum across the rest of Australia, has seen strong sales growth in this month.

Mapping out our forecasts

Given the current sales volatility, JBH has elected not to provide FY21 sales guidance.

Clearly, it is hard to determine how long at-home spend/stimulus benefits/lockdown measures may last, despite the strong start to 1H21.

To try to balance the current tailwinds/headwinds, the Board has set JBH's key management incentive financial targets for FY21 based off pre-COVID FY20 NPAT guidance of A$270m.

JBH's Board has set FY21 NPAT variable targets off achieving 0-10% NPAT growth, which equates to FY21 NPAT of A$270-297m.

We forecast revenue of A$7.9bn (flat yoy) and pre-AASB16 NPAT of A$307m (-8% yoy).

We assume strong growth in 1H21, offset by negative growth in 2H21.

Our published forecasts reflect AASB16; pre-AASB16 forecasts are on page 7 (Morgans clients can login to view detailed reports and price targets).

Investment view – HOLD and A$45.98 price target

This was an incredibly strong update from JBH as the group continues to benefit from recent events, escalated stimulus measures and strong product execution.

The question now becomes how much demand has been pulled forward?

While we think the product innovation outlook in some key categories will benefit FY21, the incredibly strong comp to cycle in 2H21 will likely see earnings fall yoy.

This doesn't concern us and we don't think the market is capitalising FY20 earnings at ridiculous levels – Hold maintained (Morgans clients can login to view detailed reports and price targets).

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