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Date : 27/01/2021

JB Hi-Fi Limited

ASX :

JBH

Market Cap : $5.86 Billion

Dividend Per Share : $0.90

Dividend Yield : 3.63 %

Buy

52 Week Range : $20.79 - $55.25

Share Price : $52.04

JB Hi-Fi is supported by a lot of structural tailwinds. Given their high dividend and above average return forecast, we issue a “Buy” recommendation.

Company Analysis

JB Hi-Fi Limited (ASX: JBH) needs no introduction as a company to Australians. It is one of the premiere retailers for consumer discretionary products in the country. They operate under 2 brands – JB Hi-Fi and The Good Guys. We are sure everyone reading this report has shopped at JBH at some point, if not every month. Hence, without much introduction, let us skip ahead to their business model.

JB Hi-Fi and The Good Guys operate 314 stores across Australia and New Zealand as of FY2020. They are the market leader when it comes to retailing technology, home appliances, and consumer electronic products. One of the competitive advantages they have is their retail partnerships with the biggest brands in the world – Apple, Samsung, etc.

Relative to its other peers, JBH group manages their floor space exceptionally well. This results in a low operating cost model than its peers. This also enables the firm to respond better to market prices to boost sales. Their gross margins are a high 21.4% even with a large number of retail outlets.

In addition to the retail stores, JB Hi-Fi has aggressively entered the online retail space just in time as the country was put into lockdown. This ecommerce segment has been the key ingredient for the exceptional share price performance and earnings growth. The online experience provides delivery or click and collect, plus an after sales service and support – very important gestures when it comes to building a successful Ecommerce presence.

JB Hi-Fi Group generates most of its revenues in Australia. Only 2.7% of the group’s revenues come from New Zealand. However, with the growth of ecommerce and the adoption of online retail, this segment is forecasted to grow. The Good Guys operates only in Australia and 30% of the group’s revenues come from the home appliances retail segment.

Company Updates

Two years ago, JBH was trading at around $20 a share. Very strong growth and a shift toward online retail resulted in share price climbing to over $40 a share just before the market crash in March 2020. Since then, the stock rebounded quickly and now trades close to it’s all-time high that was posted less than 10 days ago. This performance was due to a few key tailwinds that have been observed during the pandemic and in its aftermath.

  • Online Retail gained market share over retailers that are only offline.
  • The JobKeeper program helped people keep their jobs and this resulted in a lot of online spending during lockdowns.
  • The budgets and stimulus introduced are aimed to increase consumer spending to spur the economy back to life.
  • A structural shift towards work from home has benefitted the retail spaces such as – technology, consumer electronics, and home appliances. All segments in which JBH has the highest market share in the country.


Source: Tradingview.com

JBH online sales continue to grow. However, much of its sales are still generated through its huge network of retail outlets. This has been the cause for some volatility in recent times. The recent surge in share price in January 2021 is due to the very positive preliminary earnings report that was announced by the firm. With the report coming in very close to its half year earnings event, no surprises are expected.

Industry Outlook

JB Hi-Fi is the market leader in consumer electronics retail in Australia. Ecommerce is set to take off and the adoption has been accelerated by the pandemic.

Current estimates suggest the industry brings in overall revenues of around $34 billion and it has been growing at over 13% annually. While this high growth rate is not sustainable in the long run given the population of Australia, it is still safe to put the industry growth to be around 10% CAGR for the next 5 years.

Australia has seen a 55.6% year-on-year increase in online shopping as of November 2020, with most of the growth coming from Victoria, South Australia, and New South Wales.

The Online Consumer Electronics market in Australia is estimated to bring in revenues of $3 billion annually. It has grown considerably over the past 5 years and estimates show that it will continue to grow handsomely with a CAGR of over 7% over the next 5 years. The catalysts in the consumer electronics growth in sales is underpinned by the rising number of internet connections every year. The pandemic has accelerated this adoption and it will continue to grow.

We will also witness an overall expansion of the ecommerce industry with the integration of newer technologies. For instance, the emergence of BNPL (Buy Now Pay Later) has added long-term tailwinds to the growth in ecommerce. The catalysts for growth in the industry will be led by:

  • Technological Advancements – leading to newer products/services, the delivery of new/existing services, and the synergies from the integration of different industries.
  • Increase in Operating Channels – the advent of hybrid retail models for example has added to the growth in ecommerce of late.
  • Competition – the ease of setting up an online business has resulted in increased competition that will result in products and services that will increase customer satisfaction. This will be one of the major factors that will put an end to traditional retail.
  • Expanding Margins – Profit margins are set to keep increasing due to the overall maturity that will be achieved in supply chains and increase in sales volumes.

Investment Thesis

The financial performance in FY2020 was robust. Revenues grew 11.6% to $7.9 billion. Home entertainment was a major catalyst from March to June. The last quarter of FY2020 saw a growth of 134.3% over the previous corresponding period. The temporary closure of stores did impact sales, more so in NZ. However, the growth in online sales masked the problem it would have otherwise caused. The online revenues across the group increased by 48% in FY2020. This translated to $597.5 million or 7.5% of the group’s total revenues.

The next line item, EBITDA grew by 23% in FY2020. This was as a result of JBH being able to increase their operating income. The further their business model moves towards online retail, the higher these margins will get. The above chart shows the steep increase in the EBITDA margins to 6.8% in FY2020 as online sales revenues grew exponentially. Net Profits after tax saw a growth of 21%.

As far as H1 FY2021 is concerned, the unaudited update that JBH announced a couple of weeks ago shows Revenues growing by 23.7% compared to H1 FY2020. EBIT grew by 75.9% and net profit after tax by 86.2% compared to the previous corresponding period.

The online sales saw further growth during this half year period – contributing to 13.7% of total sales. Going forward, this is expected to continue, and estimates suggest that online sales will be responsible for about 20% of the firm’s total revenues come the end of FY2020. As explained earlier, the EBITDA margins will also increase due to online sales and FY2021 estimates suggest EBITDA margins will be over 10%. All three business segments have seen growth during the first half year as the firm continues to organically deliver exceptional growth figures.

The firm held $251 million in cash and $741 million in total debt as of FY2020. While the firm does not hold any long-term debt on its balance sheet, most of its liabilities are as a result of $796 million of Accounts Payable in the short-term and $577 million of long-term Leases for retail outlets in the long-term. While this is a substantial debt position, the firm has a health balance sheet and does not raise any red flags in the short- or long-term operations. The only downside risk was when store closures caused a worry, however, with a strong online retail segment brewing and Australia’s emergence from the virus looking very positive, JBH is financially healthy. The capital structure has always contained debt historically, and currently, they are capitalised by about 60% equity and 40% debt.

JB Hi-Fi has one of the largest dividends yields among retail players on the ASX. In FY2020, JBH paid a total dividend of $1.89 a share and also delivered a 21% growth in earnings per share. The chart below shows that the EPS growth has been robust, and its dividend payouts have a stable growth rate.

Recommendation

JB Hi-Fi will continue to deliver strong growth in revenues in FY2021. The online revenues will continue to contribute more towards the overall revenues of the firm – thereby increasing their margins and profitability. Operational efficiency will continue to increase for the firm as they rely more on online sales. While we do not expect JB Hi-Fi to outperform the broader market, our estimates suggest that they will deliver above average returns along with a high dividend payout. We issue a “Buy” recommendation to long-term investors seeking an income stock with above average share price growth.

 

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