how many toasters can the world possibly need?

Followers of BRG will recall that the company had already provided an update for EBITDA ahead of their result release, which had compelled analysts to upgrade their forecasts.

Well, having scrutinised the details of the full financial results, I am of the view that analysts will be upgrading forecasts yet again.

Put simply, this was an impeccable result, both in its “cleanliness”, as is always the case for BRG (i.e., no funny accounting alchemy or funky adjustments taken below the line), but also because based on the June Half performance compared to previous corresponding period, every single division of the company is growing strongly, irrespective of “macro” conditions, such as cyclically low consumer sentiment or unfavourable exchange rate movements:

GROWTH METRICS (JH12 vs JH11)

• NORTH AMERICA [36% of Group Revenue/48% of Group EBIT]:
Revenue +40%
EBITDA +66%
EBIT +70% (!!)

• AUSTRALIA [47% of Group Revenue/28% of Group EBIT):
Revenue + 10%
EBITDA +45%
EBIT + 54% (!)

• INTERNATIONAL [11% of Group Revenue/19% of Group EBIT):
Revenue +46%
EBITDA + 39%
EBIT + 39%

• NEW ZEALAND [6% of Group Revenue/5% of Group EBIT):
Revenue + 11%
EBITDA + 7%
EBIT + 28%

When one considers that all this growth has been achieved in a world of great geo-economic uncertainty, including high unemployment and a very weak construction market in the US, and the well-documented and intense economic crunch experienced in Europe, then I think it is a truly remarkable outcome.
(If you came from Mars and landed on earth for the first time and someone showed you this company that had grown EBIT by 43% and EPS by almost 50% - all of it organically – then you would be forgiven for thinking that the macroeconomic environment for that company was absolutely booming...not undergoing a once-a-century state of quasi-depression.)

To further understand just what is happening inside BRG, it is important, I believe to consider the company as a business of two distinct halves: The Australasian businesses (Australia and New Zeland), and the Offshore businesses (North America and International [which includes SE Asia, South America and China])

The obvious point to be made here is that almost half of BRG’s Revenue and almost 70% of Group EBIT is now derived from regions around the globe other than Australian and New Zealand, namely North America and “International”. Just two years ago, less than half of BRG’s EBIT was derived outside of Australia and New Zealand.

And that’s not because the Australian and New Zealand geographies are lagging: indeed EBIT from these “domestic” regions are 23% higher today than they were two years ago
Which highlights the clear and significant traction the that is being gained in the North American and International markets.

Put in cold hard numbers, EBIT generated by North America and International was $23m in FY10; in FY12 it had more than doubled, to $48m
(Not to put too fine a point on it, when one considers that the A$:US$ exchange rate rose from an average of 88c in FY10 to 103c in FY12, it makes the performance of these offshore businesses that much more remarkable)

Looking forward, my survey of analyst forecasts is for 15% net earnings growth in FY13, following FY12’s 23% growth (DH = 12%/JH12 = 47%) .
For what it’s worth, my own modelling – in which I try to err on the side of brutal conservativeness – points to at least a repeat of last year’s 20%-odd level of growth.

Valuation-wise, that places the stock on a P/E multiple of 12.5x, an EV/EBITDA multiple of 7,4x and a FCF yield of 7% (that’s even when Acquisition of Intangibles is included in the calculation of FCF).
That would be a fair valuation for a company growing at GDP-plus-a-bit rates, but for a company growing at 20%-odd pa, that is a significant mispricing, in my view.

Oh, and did I mention that all the growth occurs without recourse to shareholders for a single penny?
And did I mention the $47m in net cash sitting on the balance sheet?

I also draw attention to Perpetual selling down its stake (at last notice, they are at 8.5%, having come down from over 14% in February). I am sure they will be selling into the share price strength following this result.

While some people get anxious about this sort of thing I note that PPT has been selling all the way up from $3.50/share, and in addition, GUD offloaded its 19.3% stake at $3.35 in February (not too smart, I wouldn’t have thought).

That almost 25% of the company’s issued capital has been absorbed by the market, and the share price has still almost doubled notwithstanding, I suggest speaks volumes of the quality of the BRG investment.

[Interestingly, with the significant increase in the market cap over the past 6 months, and all the new liquidity in the stock, watch for BRG to be listed for inclusion into the S&P200 index when the updates are announced in early September. If my index inclusion theory does indeed prove to be accurate, then that too will do the share price no harm at all.]

Prudent Investing

Cam