Consumer cyclical

Goldman Sachs initiates on Breville with Buy

Tue 12 Jul 22, 6:01pm (AEST)
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Key Points

  • Goldman’s doesn’t believe Breville will be a casualty of reopening resulting in weaker consumption
  • The broker expects Breville to deliver FY22-24 10.4% sales compound annual growth rate
  • Breville forecast to deliver dividend yields of 11.8% in FY22 and 9.3% in FY23

Not even Goldmans Sachs’ decision to initiate coverage on Breville with a Buy rating and target price of $23.40 – a 20% upside the current price – could spark investor enthusiasm for either the consumer discretionary sector (JDJ:ASX) or the stock with both down -0.06% and -1% respectively at the close today.

Premier Investments (ASX: PMV) received similar market treatment, with the specialty retail fashion chain down -2.46% at the close following an upgrade by Goldman’s to Neutral from Sell.

While Goldman’s retains a Buy on Harvey Norman (ASX: HVN) the broker believes the stock also remains a standout on valuation – despite the price target dropping -22.4% due to a weaker housing cycle - and dividend yields of 11.8% in FY22 and 9.3% in FY23.

Defensible competitive moats

Against a challenging backdrop, Goldman’s sees two factors as critical for companies: Strengthening consumer stickiness - by leveraging data and digital – and balance sheet strength.

The broker favours exposure to discretionary goods companies with mid-high-income exposure and defensible competitive moats like Breville [and Harvey Norman] and believes the market is too bearish on these two stocks.

By comparison, the broker believes the market remains too optimistic on Domino’s (ASX: DMP), Wesfarmers (ASX: WES) and JB Hi-Fi (ASX: JBH).

Breville’s three-pronged strategy

Contrary to market speculation, Goldman’s doesn’t believe Breville will be a casualty of reopening resulting in weaker consumption, after being propped up during abnormally high covid home-in consumption.

The broker expects solid growth to continue from a three-pronged growth strategy:

  • Building on secular growth of the portioned and roast & ground (R&G) coffee market and achieving market share gains.

  • New market entry.

  • Options – ecosystem revenue streams.

The broker expects Breville to deliver FY22-24 10.4% sales compound annual growth rate (CAGR), 14.9% NPAT CAGR with return on invested capital (ROIC) in FY24 of 28.9%.

Critical step

While Breville is only at the beginning of its transformation from “product solutions” to “consumer solutions”, Goldman’s believes it’s a critical step for more accurate product innovation, faster geographical deployment and a more engaged/loyal consumer base for new revenue stream options.

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Breville share price over 12 months.

 

What other brokers think

Breville’s share price is down -35% over one year and down -40% year-to-date from a 1 January high of $31.86.

Consensus on Breville is Moderate Buy.

Based on Morningstar’s fair value of $23.49 the stock appears to be undervalued.

Based on the five brokers that cover Breville (as reported in by FN Arena) the stock is trading with 36.2% upside on the target price of $26.19.

While Morgans Add rating for Breville is unchanged, the broker’s target falls to $25 from $32 due to lower earnings estimates and lower peer company multiples.

The broker expects the trading environment for retailers to deteriorate in FY23 due to inflationary impacts on household budgets.

With higher inflation and interest rates having created higher uncertainty, Morgan Stanley broker cuts EPS forecasts across the coverage by up to -37% in FY23 and by up to -81% in FY24. 

The broker remains Overweight on Breville but reduces the target to $25 from $36 with demand for small kitchen appliances likely be impacted by a challenging time for consumers, especially in the EU.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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