Morgans Financial Limited

We are not concerned about the integration of The Good Guys or that like-for-like sales growth may moderate from here as the group cycles the more intense tailwinds from the demise of Dick Smith Holdings. We also believe that JBH's trademark lower operating cost model (and increased power of the combined group's increased scale) positions the group well to compete domestically and against any potential offshore entrant. Key risks include: 1) increased execution risk and exposure to the housing cycle (post TGG acquisition); 2)revenue/margin pressure resulting from the unwinding of TGG's joint venture stores; 3) Amazon entering the Australian marketplace; and 4) a slow-down in consumer spending. With JBH now trading on 14.2x FY18 PE (full year contribution from TGG), we lower our recommendation to Hold. Breakdown of financials below.

1H17 result beats expectations comfortably

JB Hi-Fi (JBH) reported 1H17 total sales of A$2.6bn (0.2% above Morgans forecast) and underlying NPAT of A$125.4m (10% above Morgans forecast). While total sales were in line with our expectations, the make-up wasn't, with the base JBH business surpassing our forecast and The Good Guys (TGG) maiden c1-month contribution below.

Once again, gross margin expansion (+22% bps in JBH) and operating cost control (CODB as a % of sales fell 16 bps) were the highlights and key drivers of the better than expected bottom line result. Australian like-for-like sales growth maintained strong momentum in 2Q17 (9.1% in the 1Q and 8.6% in the 2Q), despite cycling a strong pcp. Strong in-store/product execution and increased market share following the demise of Dick Smith Holdings were key to the strong result.

TGG sales increased by 0.7% in December (vs Morgans forecast of 0%) with -0.7% like-for-like sales growth and two new stores opened prior to settlement.

Strong start to the 2H and FY17 guidance upgraded

Solid like-for-like sales growth momentum continued into 2H17 with total sales growth of 9.8% and like-for-like sales growth of 6.5% within JBH. The Good Guys showed an encouraging improvement in momentum with total sales growth of 5% and like-for-like sales growth of 3.5%. JBH expects group FY17 sales of A$5.58bn, comprising:

  • JBH sales of A$4.33bn (vs previous guidance of A$4.25bn); and
  • TGG sales of A$1.25bn (c7 month contribution in FY17 and assumes a flat outcome on the previous corresponding period.

In our view, the maintenance of flat TGG sales/earnings in the 2H means that perhaps some of the strength seen in January may not be sustainable (eg. hot weather boosting cooling sales). JBH also expects underlying NPAT to be in the range of A$200-$206m (compares to Morgans previous estimate of A$193m and consensus at A$197m). Implicit in JBH's base business sales guidance is a like-for-like sales growth moderation as the group cycles the exit of Dick Smith Holdings from the market.

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