After Breville sustained strong sales of its appliances in the first four months of 2020, brokers are asking just how resilient the business will be as the pandemic continues to pressure household incomes.

-Strong shift in sales to online
-Upside risk from international expansion
-Inventory build in preparation for new markets
 

One of the few businesses to trade strongly over recent months, Breville Group ((BRG)), has proven resilient in the face of the pandemic given the demand for appliances and the new-found interest in preparing food at home.

The question is: how much of the spending is simply a pulling forward of purchases while people work from home. How many toasters can one own? Will there be a contraction in expenditure over the next few months?

Global product revenue has continued to grow, albeit at a slower rate in March and April relative to January and February. Different levels of market disruption have meant strong sales in Australia and the UK, while the US and Europe have lagged because of a substantial store closures.

UBS believes the update, which highlighted revenue growth of 32% in the first four months of 2020, shows the resilience of the business model and a strong shift in sales to online, while international expansion provides the upside risk.

UBS, conservatively, assumes revenue growth of 10% over May and June for both global products and distribution. Global products revenue, around 80% of sales, lifted 23.7% in the period while distribution, around 20% of sales, grew 29.7%.

Ord Minnett assesses the business was well-placed ahead of the market disruption caused by the pandemic, because of higher-than-normal inventory levels surrounding the risk from Brexit.

Capital Raising

The company has, after withdrawing guidance in late March, announced a capital raising along with the impressive revenue growth. Breville is raising $104m in equity to support working capital investment and R&D.

Wilsons notes a cautious tone from management, given lenders insisted on the capital raising despite the liquidity position being favourable. This signals headwinds to demand may be emerging, amid the potential for retailer de-stocking leading into Christmas.

On the other hand, the company is primed for aggressive expansion should the global economy recover faster. Macquarie suggests the additional capital means the business can avoid missing sales and retain the headroom to expand into new areas, as well as assess opportunistic acquisitions.

Credit Suisse believes the equity raising provides the flexibility to handle disruptions. Still, the duration and potential impact of the pandemic remain unknown. Working capital generally picks in November and the company is expecting further inventory build up in preparation for entering new markets in FY21.

Breville launched Sage in France in April and is currently in the process of transitioning the Middle East to Sage, while preparing to enter additional markets in FY21. Should $20m in cost reductions be achieved, then UBS assesses FY20 earnings will be up 19% and beat the guidance that was previously withdrawn.

Meanwhile, management has taken as temporary reduction in salary and marketing expenditure has been reduced by -45%. Marketing will be re-allocated towards online channels while demonstrator activity has been reduced because of the closure of stores and depleted foot traffic.

Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, has an Underweight rating and $14.90 target, pointing out peers have provided more conservative updates over recent weeks.

In contrast, Bell Potter, also not one of the seven, strengthens short-term growth forecasts, welcoming the significant liquidity the equity raising has provided for growth opportunities and retaining a Buy rating and $23 target.

Macquarie downgrades to Neutral from Outperform, given the strong re-rating in the stock. Nevertheless, the broker considers Breville one of the key stocks to own during the pandemic, expecting growth will continue, supported by key categories such as coffee and food preparation.

The database has two Buy ratings and two Hold. The consensus target is $20.57, suggesting 4.2% upside to the last share price.

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