BUY HOLD SELL – Breville Group (ASX: BRG)
Breville Group (ASX: BRG) is a maker of electrical appliances in the consumer products industry. Most of you likely own or have owned a toaster/kettle/sandwich press from them at a one point in your life. It is a great Australian brand founded in Sydney in the early 30s. The company operates through two main segments, Global Product and Distribution. The former offers premium products designed and developed by BRG which are sold globally. Accounts for ~80% of revenue. The Distribution segment sells products that are designed and developed by a third party. Accounts for ~20% of revenue. So, the Global Product arm is really what it’s all about. Revenue growth from the start of the year to May lifted 32%, remaining strong through the period of peak volatility, characterised by a robust shift to online sales. Gross margin over the January to April period was consistent with the first half. In response to COVID-19, BRG moved swiftly to manage cashflows and reduce cash expenses to minimum levels, while also ensuring product development continued. Cost savings implemented through March and April total ~$5m a month. Possible non-cash write-downs at the year-end - if capitalised projects are shelved or if future sales estimates are reduced – was the only weak point in its May update. In May the company tapped the market for $104m, the first time since listing, to help shore up its balance sheet and ensure the execution of its growth agenda. It also refinanced a significant portion of its $385m debt facility. The multibillion-dollar toasted sandwich is the end goal. Morgan Stanley sees the appliance maker capturing a third of the 10-billion-dollar market opportunity in the next decade. An exciting prospect for any investor looking to take advantage of the systematic shift to the ‘work from home’ revolution. If Morgan Stanley’s growth assumptions are to be believed, implying 10% compound growth, a future share price of more than 6000c is calculated. That’s one pretty tasty toasty. Main Observations:
- ROE is excellent at 20.1%, although it is expected to come off modestly in FY2 and FY3.
- Revenue growth and EPS growth are both expected to be positive for the foreseeable future. It would be nice to see revenue ahead of EPS growth. Earnings likely weighed down by global expansion and R&D efforts.
- A PE of 41x isn’t what you’d call cheap, you’re certainly paying for the earnings. That said, the measure is expected to continue to fall; only 27.3x in FY4.
- More than half of the brokers surveyed by Thomson Reuters have a BUY or STRONG BUY recommendation.
- Its trading at a 10.8% premium to the average broker target price and a noteworthy 45% discount to intrinsic value.
- It trades with a slightly elevated level of volatility, weekly ATR as a percentage of price is 12.1%. In short, it typically moves ~12% in either direction every week.
- Share price performance is also outstanding, will touch on that more in our technical view.