Breville Group: FY21 result - A strong blend despite today’s cold brew

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Senior Analyst
Date posted:
18 August 2021, 9:30 AM
Sectors Covered:
Gaming and Retail

  • Shares in Breville Group (ASX:BRG) sold off after it delivered earnings in line with, but no more than, guidance. This is hardly surprising given the premium valuation of the stock, but certain positive dynamics may have been missed in the rush to take profits. These include: (1) Constant currency sales remained elevated through the second half; (2) Investment in product development and marketing ramped up nearly to the target ratio of 12% of sales, underpinning future growth; (3) The strength of the balance sheet provides optionality for new markets and possibly even M&A.
  • FY21 EBIT of $136.4m was up 24% and in line with guidance and our estimate. NPAT of $91.0m was up 25% and in line with forecast. We have made no major changes to estimates for FY22 and FY23. We forecast 14% growth in sales and EBIT in FY22.
  • We maintain an ADD recommendation with a 12-month target price of (login to view).   

Investors took exception with the lack of an earnings beat

There is an expectation that stocks trading on premium multiples (other than start-ups, unicorns and other exotic creatures) will beat consensus forecasts on a reasonably consistent basis. This assumption is accentuated when demand for a stock’s product has clearly been running at elevated levels.

Breville didn’t beat guidance today – at least not by much – although it still achieved 37% constant currency growth in Global Product sales. The market was surprised (not in a good way) and sold off the stock: BRG closed down 8.9%.

The negative share price reaction was hardly unfathomable given the lack of an earnings beat and the cautious outlook commentary, but we think there are positive dynamics at play at Breville that may have been missed in the excitement. These include:  

1) Constant currency revenue growth was elevated through the year

The weakening of the US dollar had a material impact on the translation of second half earnings. Reported revenue growth in Global Product was 21.6% in 2H21 following 34.0% in 1H21, but constant currency growth looked very different: 34.7% in 2H21 following 39.2% in 1H21, returning 37.0% for the year.

The vast majority of this growth was organic. This indicates to us that consumer demand for electrical appliances remained strong through the year and, while we expect growth to moderate in FY22, we think it will continue to impress.

2) Investment in product development may underpin future outperformance

When CEO Jim Clayton took the reins at Breville, he articulated a strategy to increase Breville annual investment in the growth initiatives of marketing and product development from 8% to 12%.

The sales bonanza of FY21 allowed Breville to accelerate this transition nearly to the target of 12%. Having got there, we expect the business to maintain this ratio, which is consistent with other top consumer product companies, underpinning future growth and maintaining a position of technical leadership.

We believe a healthy pipeline of new, innovative product will also allow Breville to achieve increased selling prices in FY22, offsetting input cost inflation.

3) Optionality exists around further new markets and M&A

Breville ended FY21 with $130m in net cash ($91m after lease liabilities). Although we expect this to come down in FY22 as Breville rebalances its working capital position, there remains lots of capacity to fund entry into new markets and possible M&A.

Breville’s entry into new markets has a slow burn effect. Sales really accelerate in Years 2 and 3 and this consumes working capital.

We maintain a positive stance

We can’t ignore that, even after today’s sell-off, Breville continues to trade at a handsome premium to other Australian industrials. Nonetheless, we see this premium as justified given the prospect for multi-year, globally-derived organic revenue growth at or above 10%.

This prospect is only likely to be solidified by the increased investment in product development and marketing, coupled with margin expansion. We have made only minor changes to estimates (FY22 NPAT down 0.3%) and retain an ADD recommendation and (login to view) 12-month price target.

Risks

Our positive view will be wrong if Breville fails to maintain sales growth above 10% in FY22 or is unable to pass through input cost inflation in higher prices.

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