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.
- 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.
Morgan Stanley are the most bullish with an OVERWEIGHT recommendation and a 2800c price target. Scalable business model, defensive earnings, and a good expansion record some of the highlights for the broker. Morgans has a similar investment case, attracted by the growth drivers of the global rollout, existing growth, new product development and covid-19 related trends such as home cooking and a shift to expresso coffee. Expansion into Europe is expected to have the biggest earnings impact. Sees future revenues of greater than $3bn vs $750m in FY19. Macquarie downgrade to NEUTRAL on price strength. Noting the stock is an attractive long-term portfolio holding, given the extended growth potential. Considered BRG’s capital raising earlier in the year prudent. UBS notes revenue grew 32% over January to April. However, remains cautious about the extent of purchases being pulled forward in a working-from-home environment.
WHAT SORT OF INVESTMENT IS BRG
The company is a growth and global expansion play. It has a proven track record of developing new and innovative products for its customers and converting R&D spend into revenue growth. R&D expenditure has lifted from 8% of revenues in FY15 to 11% in FY19. It has a strong pipeline of medium-term growth initiatives and its decision to strengthen its balance sheet in May supports its ongoing growth agenda. BRG has made substantial headway in its target markets, entering seven European countries with a direct selling model in the last three years.
The company has delivered accelerating EBIT growth over the last 5-years with R&D, marketing, supply chain and IT systems in conjunction with international expansion driving strong financial results. Its global online infrastructure investment also enables BRG to market and deliver to customers directly. Since FY16 the company has recorded a consistent pace of expansion in new and existing markets, developing its strategy in the Middle East and France more recently with pans for entry into further markets in FY21.
The stock is up 150% from its March low and is currently 6.1% off its February high. RSI is elevated, although not in overbought territory. It recently broke through a resistance level at 2400c which held since mid-June. Next support/resistance likely at 2500c based off previous movements.
BRG is another great example of a stock that consistently performs. Aside from the spike and slump through Feb/Mar, it has a robust, long-term uptrend (see blue chart below). A few weeks ago, Marcus was talking about keeping the balance of probability in your favour by identifying companies that were moving bottom left to top right (BL2TR). BRG passes that criteria with flying colours.
Encouraging to see a skew to buying, with a couple of large parcels of stock purchased in the last few months.
Short interest in the company is negligent, at 0.3%. This is nothing to worry about. What is interesting to see is that the small amount of interest has halved since mid-June, from 0.64% to 0.28%. Clearly not many people are betting against the business. Good to see a declining overall trend in short positions since the start of the year as well.