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Date : 14/02/2023

JB Hi-Fi

ASX :

JBH

Market Cap : $4.83 Billion

Dividend Per Share : $3.50

Dividend Yield : 7.90 %

Hold

52 Week Range : $36.69 - $56.85

Share Price : $44.82

A consumer durable goods retailer that will see normalising earnings in the current economic downturn but has a very sound business for long-term investment at attractive prices. We recommend a 'Hold.'

Company Analysis

Major consumer electronics and home appliance retailer JB Hi-Fi (ASX: JBH) saw its share price drop by 5% yesterday despite the company’s reported earnings for 1HY23 coming at a record high level. It reported an increase of 8.6% in its sales in the six months to 31 December 2022 compared to PCP (1HY22) and an increase of 14.6% to its net profit after tax with an increase of 20.4% to its earnings per share for the period to $3.02. It also declared a fully franked interim dividend per share of $1.97, representing a payout ratio of 65% and a 20.9% increase to the previous interim dividend payout.

The pleasing reported results, however, were already priced into the retailer’s share price as they were in the company’s preliminary 1HY23 results report announced to the market on 17 January 2023. What was new in yesterday’s announcement, however, was the January 2023 sales update that showed moderating sales growth. The peak COVID period demand is normalising by the removal of stay-at-home orders and weakening consumer sentiment as the high inflation rate and rising interest rates continue to bite households’ discretionary spending.

The JB Hi-Fi Group consists of two brands, JB Hi-Fi Australia & NZ and the Good Guys. JB Hi-Fi brand is a leading retailer of technology and consumer electronics, and The Good Guys brand is a major retailer of home appliances and consumer electronics. Total sales growth for JB Hi-Fi Australia during January 2023 was 2.5% versus 4.3% in January 2022, and total sales growth for The Good Guys was 0% versus 2.5% in January 2022, indicating a slowdown in the Group’s sales.

JBH is one of the best Australian retailers

With Australia’s population being slightly more than 26 million and New Zealand’s population less than 5 million, the countries’ retail space is tightly contested as expansion opportunities are limited. So the best-positioned retailer will attract most of the demand, and JBH is number one in what it does for its following competitive advantages:

Large scale: JBH is the number one player in the Australian consumer electronics and home appliance market with strong and engaged supplier relationships both locally and globally. It has a large, engaged and diversified customer base across its two brands, which provides suppliers with the ability to execute promotions and new product launches at scale. In addition, its high-volume website traffic provides significant marketing opportunities and reach.

Low-cost operating model: JBH has a constant focus on productivity and minimising unnecessary expenditure, which has given rise to a highly productive floor space with high sales per square metre. The low-cost operating model allows it to compete effectively with traditional competitors and new market entrants by being able to respond to market price activities and maintain its market share.

Multi-channel capability: JBH customers can shop in-store in high-quality and convenient locations or online with an optimised digital experience as well as over the phone for a more personalised shopping experience which gives customers the ability to negotiate a deal. JBH also has a reputation for fast order fulfilment and good after-sales support.

Investment analysis

JBH has a strong balance sheet with more than $391 in cash as of 31 December 2022. It has always had a solid cash conversion ability, and 1HY23 was no exception. The company generated $635.1m cash from operations in the first half, which is outstanding given that EBITDA for the period was $588.5m. The combination of strong cash generation ability and cash balance provides support for future dividend payouts. JBH has a long history of paying out decent-sized dividends.

JBH’s dividend payout history in dollars

 

JBH had a net tangible asset per share of $3.29 as of 31 December 2022. Although this number is small compared to JBH’s current share price of around $45, it’s normal for retail stocks to trade at high multiples of their tangible assets as their valuation is driven by their earning power and brand reputation.

As a retailer of consumer durable goods, JBH’s earnings are however cyclical. 1HY23 earnings came at a record high level, but the sales slowdown witnessed in January 2023 trading is an indication that JBH’s earnings have peaked and are set to normalise from here. Demand for consumer electronics and home appliances soared during the COVID as stay-at-home orders encouraged consumers to spend more on home improvements and entertainment. But with the pandemic in the rearview mirror and deteriorating consumer sentiment driven by the high inflation and rising interest rates, we can see JBH’s earnings normalising towards pre-pandemic levels. People who bought new laptops or TVs in the last two years are not going to do it again in the next two years, especially with discretionary spending on the decline.

JBH’s stock is covered by 13 analysts, and they estimate a $4.40 earnings per share for FY23. With the 1HY23 earnings at $3.01, we can say a circa 40% drop in 2HY23 earnings has already been priced into the stock. Based on these numbers, JBH’s stock is currently trading at an FY23 price-to-earnings multiple of 10.1x. And assuming a similar payout ratio of 65% for the final dividend, JBH is offering a fully franked dividend yield of 6.4% at the current share price of $45.

The analysts also expect a 22% drop in FY24 earnings per share to $3.44, which is in line with our normalising earnings expectations, but still significantly higher than the pre-pandemic level of $2.15 in FY19, which leaves room for earnings disappointment if the expected economic recession continues well into 2024.

How to play JB Hi-Fi’s stock?

We believe JB Hi-Fi is one of the best retail businesses on the ASX with a solid market share and multi-channel presence across Australia and New Zealand. The company is very well-run with efficient operations and evident competitive advantages to maintain its profitability and market share in the long run. Nevertheless, JBH’s business is cyclical, and with the economy currently going through a contraction phase, we can expect JBH’s share price to consolidate around the current levels as its COVID-boosted earnings normalise at a faster rate by the deteriorating consumer sentiment. As such, we recommend current shareholders to “Hold” their positions on the stock and add more in the likely event that the share price once again comes down to the support level of $38 (the green line on the chart).

 

JB Hi-Fi, Weekly Chart in Semi-log Scale (Source: Metastock)

 

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