Apologies for those who have heard it all before, but someone - I forget who - asked me on another thread what it was that I liked about BRG as a long-term investment, so I thought it best to simply cut and paste some views posted last year.
Date Posted: 31/07/2012
BRG's trading update today says a lot about the value creation attributes of the business and the resonance of the Breville brand:
FY12 EBITDA has come in at around $73m. That compares to $58m in FY11, so full-year growth of 25% at the EBITDA line (all of it purely organic)
However, the full-year numbers disguise just how potently the business is travelling at the moment.
Distilling these full-year EBITDA figures into half-year elements yields the following (note that December half is always the seasonably stronger period for the group):
The growth rates over prior corresponding periods is therefore:
DH11 vs DH10: 17% JH12 vs JH11: 40%
So, significantly, growth has accelerated over the past 6 months. Amazingly, that acceleration has been achieved against the backdrop of a strenghtening Australian dollar [a signficant consideration given that more than half of BRG's sales are now offshore] and an environment of poor economic and consumer sentiment.
[It is my intention this reporting season to monitor which other company comes even remotely close to achieving 40% organic EBITDA growth...I'll make an early wager than none will.]
For added context, I note - with a degree of awe - that this company has doubled EBITDA and increased NPAT 2.4 times over the past three years.
And the most impressive thing has been that this has occurred purely organically and without any recourse to shareholders for funding.
In fact, quite the opposite: the balance sheet has gone from a net debt position of some $75m in December 2008 to a net cash position today of some $30m-odd today.
In other words, the underlying earnings base of the company has been more than doubled, the dividend payout ratio has increased at the same time, and still over $100m has reported to the balance sheet!
Very very few enterprises can boast that sort of outcome.
This is a unique company, and one that will create wealth for shareholders for many years to come, I believe.
Date Posted: 6/9/2012
This post is in response to a point raised by WHY on a Telstra thread:
WHY,
I'm not sure how Capital IQ (whoever they are) defines their forward EV/EBITDA multiple. Based on their EV/EBITDA multiple of 8.25x, it sounds to me like the “forward” point in time they used is June 2012:
Mkt Cap = $625m; Net cash = $24m (I suspect they used the Dec 2011 balance sheet) for Enterprise Value of ~$600m FY12 EBITDA = $72.5m (mid-point of recent guidance) So, EV/EBITDA = 8.25x
If this is the case, then it is somewhat irrelevant as it is a bit backward looking, without due consideration for the growth prospects for the company.
How I prefer to evaluate the investment opportunity is to consider the drivers of future earnings, mainly the North America business, but also the Asian/Chinese opportunity in the medium term.
Looking at the North American business, I think they have just started gaining traction in product awareness in that market, with 12-month rolling EBITDA trends as follows: For the 12m to Dec: - 2008: $-0.3m - 2009: $8.3m - 2010: $15.6m - 2011: $30m
For further context, the North American business is now BRG’s largest EBITDA generating geography, at 47% of total group EBITDA (Australia: 31%, Global: 18% and New Zealand: 5%).
North America’s ascendance has travelled as follows: (North America EBITDA contribution share): - 2008: 9% - 2009: 26% - 2010: 29% - 2011: 47%
Moreover, sales into North America of $140m over the past 12 months should be seen in the context of a $50bn North American kitchen appliance market (source: http://www.prlog.org/10546588-kitchen-appliances-global-industry-guide.html ). I therefore think that BRG’s sales and earnings from North America could increase significantly over coming years.
Looking specifically, group-wise, under a reasonable sane scenario EBITDA for FY13 could exceed $85m (comprised contributions in the table below), even under a moderation in the rate of growth in the US and even assuming the Global business remains at a contribution level well off its peak, despite the investment in raising brand awareness and distribution in Malaysia, South Korea, and Singapore and the growing brand presence in China.
EBITDA DH10 JH11 DH11 JH12e DH12e JH13e Australia 16.6 5.7 14.2 6.5 16.1 7.7 North America 12.5 7.2 22.8 14.6 26.7 18.4 New Zealand 1.7 1.0 2.3 1.1 2.4 1.4 Global 8.0 5.6 6.0 6.0 6.6 6.9 Other -0.2 -0.6 -0.2 -0.5 -0.2 -0.5 GROUP TOTAL 38.6 18.9 45.2 27.7 51.7 34.0
Making some reasonably conservative assumptions about: - high working capital-to-sales ratios (22%, compared to 20.5% over the past 4 reporting periods), - $4.5m of capex and intangibles purchases (in line with recent history), and - an increase in the dividend payout ratio to 65%, from the current 60%
this would result in net cash at the FY13 balance date at around $30m.
So, with none of the above assumptions being overly hairy-chested, I don’t think, I see BRG in FY13 generating EBITDA around $85m (which would be 17% up on FY12’s $72.5 which, in turn, is 24% up on FY10) and EPS of 42cps.
This would value the stock on an EV/EBITDA multiple of 6.9x and a P/E multiple of less than 12x. For a stock with the global organic growth prospects, the considered and prudent management team, and the pristine balance sheet, I think this is far from a demanding valuation proposition.
In my mind’s eye, I see BRG earning a dollar a share at some stage in the not-too-distant future. And given that this is mainly an pre-eminent brand, R&D business with outsourced manufacturing and distributorship, the capital-at-risk to achieve strong organic growth is minimal.
I don’t think I am paying anything for success in Asia, nor any meaningful recovery in the New Zealand or Australian markets, and I think I am paying for just one year’s growth in North America, but beyond this, not much more.
If these guys are today growing EBITDA organically at a clip of 40% in a world of a sharply rising A$, a static US economy and overwhelming despair in global capital markets - which is what JH2012 vs JH11 equates to - I suspect analysts will be spending a lot of the next 12 months upgrading EPS forecasts for FY13 and FY14, from their current 10%pa growth rates expectations.
Date Posted: 23/08/2012
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
BRG Price at posting:
$6.39 Sentiment: Buy Disclosure: Held
(20min delay)
