JB Hi-Fi: Electric Dreams - A resilient 1H22 result, augmented by a $250m buyback

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By Alexander Mees

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Head of Research

Date posted:

15 February 2022, 10:00 AM

• JB Hi-Fi (ASX:JBH) pre-announced its headline 1H22 earnings last month. The full earnings release issued today confirmed that EBIT was down 9% to $420.5m, but this was 60% above 1H20 and 17% above our estimate before the January trading update. Gross margins and operating cash flow were better than we had forecast.
• A $250m off-market buyback was announced.
• We have increased our EPS estimates by 1.7% in FY22F and 5.1% in FY23F, taking account of higher forecast sales and a lower forecast share count. We reiterate our ADD rating and (login to view) target price.

Event: 1H22 earnings

1H22 sales ($4,861.8m, down 1.6%); EBIT ($420.5m, down 9.1%); and NPAT ($287.9m, down 9.4%) were all pre-announced on 18 January, along with LFLs.

The new information disclosed today included a 163c interim dividend, down 9.4% and 5.2% above our estimate, and a gross profit margin of 21.9%, down 10bp but 40bp higher than our forecast. Operating cash flow was up 90% to $850.2m, reflecting significantly lower working capital.

Against strong comps, JBH enjoyed a good start to 2H22. LFL sales in January were +3.6% in JB Hi-Fi Australia (+22.2% vs. 1H20); down (1.8)% in JB Hi-Fi New Zealand (+19.5% vs. 1H20); and up +1.9% in The Good Guys (+16.4% vs. 1H20).

Analysis

Sales resilience set to continue.

JBH reported that it experienced ‘heightened customer demand’ for consumer electronics and home appliances (notably coffee machines and stick vacuum cleaners) in 1H22 and into January 2022.

Reduced inventory availability across the sector has meant discounting has been limited. Positive LFL sales growth in January 2022 was achieved despite disruption from Omicron. Foot traffic to shopping centre stores appears to have been affected by Omicron, but this was more than offset by an upturn in traffic to standalone stores as well as online.

The LFL comps get less challenging as the year goes on, and we forecast 2H22 LFL sales growth of +0.5% in JB H-Fi Australia; (6.5)% in JB Hi-Fi New Zealand; and +1.3% at The Good Guys.

We think margins will ease in 2H22.

The 1H22 gross margin (21.9%) was better than the 21.5% we had forecast. This benefitted from product mix and reduced discounting, although it was partly offset by a lower attach rate of services like telecommunications.

We believe the positive mix effect is likely to be sustained as software continues to decline as a proportion of sales. But with inflation swirling and the risk of discounting returning, we forecast a 30bp half-on-half reduction in the gross margin in 2H22 to 21.6%. 

Working capital will rebalance.

The inventory balance was $71m down yoy at the end of 1H22. As JBH had increased purchasing of inventory late in 1H22, payables were significantly elevated (up $134m yoy). We expect working capital to rebalance by the end of 2H22, with a net operating cash outflow in the period.

The cash flow in 2H22 will also reflect the buyback in April 2022, but JBH’s balance sheet will, in our opinion, remain strong. We forecast ND/EBITDA (including leases) of 0.5x as at June 2022. Net cash, excluding leases, is forecast to be $88m.

Forecast and valuation update

A more positive view on LFL sales growth has caused us to increase our revenue forecasts by 1.1% in both FY22 and FY23.

Our operating margin forecasts are broadly unchanged. The reduced number of shares arising from the off-market buyback means our EPS forecasts rise by 1.7% in FY22 and 5.1% in FY23.

Investment view

We see JBH as a well-run retailer with good cost discipline, a robust balance sheet and a strong market position.

Although we see only modest growth opportunities, we regard JBH as undervalued at current multiples and reiterate our ADD rating.

Risks

JBH is often regarded as a ‘COVID beneficiary’ and a material drop-off in customer demand would be detrimental to our positive recommendation.

Increased promotional activity and cost inflation may eventually see margins come up under more pressure than forecast.

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