Consumer Discretionary: Post FY19 reporting season stock take
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 10 September 2019, 5:11 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
- On balance, retail results were better than expected while outlook commentary/tone was also more upbeat. Auto/motorcycle/RV sales were the worst hit in FY19 due to high basket size, housing linkage and the discretionary nature of the product.
LFL sales growth was fairly resilient, with momentum building from June and persisting into July/August trading updates. A vast majority of this LFL growth continues to be underpinned by online growth/penetration.
- Cost pressures remain in terms of FX (COGS) and digital/supply chain/IT investment (CODB). GMs were broadly more resilient than expected despite FX pressure, suggesting pricing pass-through and/or steady competitor activity.
- During reporting season we upgraded our ratings on the following stocks: Beacon Lighting (BLX), MotorCycle Holdings (MTO) and Super Retail Group (SUL). We downgraded Bapcor (BAP) to Hold (from Add).
- The impact from tax cuts/refunds should continue to buoy LFL sales growth over the balance of 1H20 and AGM trading updates provide a positive catalyst. Post these handouts, we still see moderating headwinds via lower interest rates and improving housing conditions in FY20. We therefore think valuations are broadly sustainable.
- Our key picks include: AP Eagers (APE), Baby Bunting (BBN), Beacon Lighting (BLX), Lovisa (LOV) and Noni B (NBL).
Outlook tone/commentary more upbeat vs recent history
Reporting season saw improved outlook rhetoric from a range of companies:
- JB Hi-Fi (JBH) "more positive environment post the election" and "cautiously optimistic [on FY20 trading conditions]";
- Super Retail (SUL) "some green shoots in terms of consumer behaviour" and "across all four brands…we're seeing sales momentum accelerate;
- Bapcor (BAP) "seen trading improvements across all divisions in FY20"; "less aggressive competitive backdrop";
- Beacon Lighting (BLX) "housing related conditions will gradually improve over the first half";
- MotoCycle Holdings (MTO) "seen signs of bottoming in new bike sales after three years"; and
- Apollo Tourism & Leisure (ATL) "improved [RV] sales volumes in final weeks of FY19 and into FY20".
Performance comes from PE expansion not earnings upgrades
Within our retail coverage, the average PE re-rated by 20% over reporting season. This compares to the average consensus EPS movement of these stocks of 3%.
So a vast majority of stock performance within our coverage has been due to higher multiples applied due to reasonable LFL sales trading updates, more positive outlook commentary, the prospect of fiscal stimulus during 1H20 and diminishing underweight/short positions.
We also note that multiples were coming off a reasonably low base for the larger, mass market retailers.
The most notable stocks to benefit from PE expansion were: MTO (+68%); DMP (+28%); LOV (+26%); ADH (+23%); BLX (+22%); SUL (+19%); BBN (+18%); AX1 (+15.5%), JBH (+14.9%) and BAP (+14%). The most notable EPS upgrades we made included: MTO (+19.4%); BBN (+13.3%); and ADH (+11%).
Consumer headwinds easing in FY20
Lower interest rates, tax cuts/refunds and improving housing conditions (price growth vs c15% price falls in FY19 – albeit on subdued volumes) should all result in easy consumer headwinds in FY20 relative to FY19. Hedging profiles step down in FY20 (some worse than others depending on stock turn/hedging agility), posing further inflationary pressure on COGS.
That said, retailers have managed the material depreciation of the AUD reasonably well over recent years.
Price increases should further support LFL sales growth in FY20.
AGM trading updates the next catalyst
Most retailers in our coverage provide a formal trading update (LFL growth) at their AGMs.
Given the solid FY19 result trading updates, improving housing conditions and the likely positive impact from tax rebates, we think these updates will be positive and therefore pose the next catalyst for the sector.
We nominate BLX, SUL, AX1 and MHJ as having the best potential trading updates relative to current consensus expectations (taking into account what each of these companies is cycling in addition to recently reported momentum).
Stock in the spotlight – Beacon Lighting
We upgraded our rating on BLX to Add after a prolonged period as Hold rating.
2H19 presented a perfect storm of trading conditions for the group – Elections have historically had a material impact on BLX's trading + lower housing churn/price.
BLX has a track record of bouncing back strongly and quickly following a softer trading period.
We think BLX's August LFLs turned nicely positive. We forecast 11.9% EBITDA growth in FY20 vs ConsensusE of -1.4-0% growth.
We therefore think BLX is a good candidate for beating consensus forecasts by a reasonable margin this FY with recent headwinds turning.
Morgans clients can access my full research note: Consumer Discretionary – Post FY19 reporting season stocktake. Alternatively, contact your Morgans adviser or nearest Morgans office for a copy.
Disclaimer(s): Analyst may own shares in companies mentioned. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.