Beacon Lighting: Tempering forecasts
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 17 January 2020, 5:14 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
- Following a review of our 1H earnings expectations, we think it will be difficult for BLX to make up enough ground in the 2H to meet our prior earnings forecasts.
- We lower our earnings forecasts by c5%
- We expect little in the way of top-line growth in 1H20 (few new stores, modest comps), while FX will see the GM step down. Despite our expectation for reasonably well contained operating costs, GM pressure will likely see 1H earnings fall on the pcp.
- We think BLX can ultimately benefit from the improving housing backdrop and a potential rebuild program.
- Based on current multiples, we maintain a Hold rating
Moderating our earnings forecasts
Having reviewed our key modeling assumptions, we make c5% EPS downgrades across our forecast years.
With few stores opened and likely flattish LFL sales growth, we aren’t expecting much in the way of top-line growth the 1H.
The well flagged FX headwinds will impact the 1H20 GM, before hopefully reverting in the 2H as the group cycles a weak pcp.
BLX has a long track record of managing its cost base throughout various trading environments and we expect the company to have contained them again this half, despite softer sales.
1H20 result expectations
BLX will report its 1H20 result on Tuesday 18 February. We forecast relatively flat revenue growth, EBITDA -4.5% and EBIT -6.3%.
To meet our updated FY20 EBIT forecast, BLX would need 2H EBIT to grow by c22% (remembering the group is cycling a very weak pcp – 2H19 EBIT fell by 37.4%).
DC sale and leaseback a great result
Late last year, BLX announced the sales and lease-back of its Brisbane DC for A$28m (c2x what BLX paid/invested in the property since early 2019).
BLX stated that the funds would be used to retire debt and redeployed into ‘other business opportunities’ in time.
For now we have assumed BLX pays down debt by cA$18m. BLX has also announced the exit from its Solar business due to unsustainable margins.
This will result in one-off winding-up costs of A$3.4-3.9m which we have taken below the line.
Given we expect a pretty tough 1H20 result, we maintain a Hold rating on BLX. Despite earnings downgrades, our DCF/PE valuation is steady (Morgans clients can login to view detailed reports and price targets) due to a lower risk-freerate assumption.
We think the group is well placed to ultimately benefit from improving housing conditions, industry consolidation and a potential rebuild phase post the tragic bushfires.
Key risks: consumer spending slow-down (given BLX’s product is highly discretionary); materially lower AUD; increased competition; operating costs growing at a faster rate than sales; and an inability to secure suitable sites hampering the store rollout.
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