BRG - Breville Group

[pixel]

Wouldn't you get 14% MORE profit converting USD (profits) to AUD now than when they were at parity?

When they repatriate USD profits, they get 1.14 AUD, not .86 (I think you have that the wrong way around).

sorry, you're right
I'm trying to do too many things at once

 

[skc]

Could somebody tell me why they were adversely affected by USD increase? I would have thought that's a good thing...

May be they have plenty of costs based in the $USD as well? E.g. Do they manufacture in China and sell in Aus with the Yuan being linked to $USD?

 

[Ves]

May be they have plenty of costs based in the $USD as well? E.g. Do they manufacture in China and sell in Aus with the Yuan being linked to $USD?

Breville is a designer, not a manufacturer. Their source of profitability is reliant on their ability to differentiate their products through design capability & value-adding, and also their marketing ability.

The product manufacturing is outsourced to Chinese manufacturers, as far as I understand (just like most things these days).

For this reason there are low capital requirements. It's basically a working capital (inventory + debtors) + people business.

It's earnings are effected by two cycles: the product development cycle (see fluctuating capex / R & D - especially when they enter new markets) & the economic cycle. Their cash flow decreases when they need to rejuvenate & restock their product range in a geography.

My understanding is that the last report highlighted this happening in US / Australia, which also had patchy economies. The market has continued to re-rate it on the basis of this being more structural / permanent / erosion of profitability rather than a transitional period (the last period was around the GFC in the USA for instance). Or perhaps it initially underestimated the effects of the cycles.

The market is probably playing tug-of-war between the two scenarios of cyclicality of earnings & permanent (part or full) erosion of excess profitability.

Probably doesn't help that a number of retailers have downgraded earnings recently. Don't really think it has much to do with the US dollar.

 

[herzy]

Don't really think it has much to do with the US dollar.

Really appreciate the in-depth analysis Ves - but I was referring to comments made in the AGM today, where they specifically flagged the high USD affecting profits.

 

[Ves]

Really appreciate the in-depth analysis Ves - but I was referring to comments made in the AGM today, where they specifically flagged the high USD affecting profits.

Sorry I was just rambling.... more for my own benefit (so I didn't forget what I was thinking today).

The AGM comments re higher USD were in relation to the A & NZ market. Breville is an importer (ie. they outsource manufacturing to China), so that part of what SKC said I agree with. They'll just re-price / re-align their cost base long-term if they really do have a competitive advantage in Australia.

 

[hiddencow]

Was going to PM this to Valuesnatcher but your inbox is full so I'll post it here.

I'm just having a look at BRG and trying to figure out if a lower AUD will be positive or negative for them.
While they have a lot of overseas earnings, the costs of their products seem to be all in USD.
The lastest results noted that ANZ profits were down due to a higher USD. It was noted that prices would be adjusted though.

The way I see it is that in the short run a lower AUD may affect the ANZ profits but in the long run when prices adjust, overall profit should be higher when reported in AUD, especially for overseas earnings which aren't impacted by moving exchange rate. The same USD profit will just translate to a higher AUD profit.

What I found interesting is the loss they suffered for foreign currency derivatives. All their derivatives are buy USD/Sell other currency with the majority being AUD. I would have expected a gain on derivatives for the year with the AUD weakening. Instead it looks like they got a pretty raw deal, hedging at an average 88c. Of course the derivatives would be in profit now but I thought it was weird how you can lose on your hedge but also suffer lower profits due to higher USD costs.

Would love to hear your thoughts.
Cheers

 

[VSntchr]

I think that BRG with regard to the falling AUD is a good prospect.
If management is successful in continuing to expand the US division, and to get the UK division firing also, then the Aus earnings will become smaller and smaller proportion of the overall earnings due to their reach within our market being much closer to saturation and as such providing lower prospects of double digit growth going forward.
From an individual investors perspective when assessing these factors I think timeframe is important. For me, I like the safety of having something that is likely to increase its foreign earning power over the med/long term. This reduces my overall portfolio's exposure to the AUD.

 

[galumay]

I am reassessing my holding in BRG and on looking through the H1 report I am a little confused, operating cash flow is negative for the half, which is obviously not a good thing, but it looks like historically it is negative often in the first half of the FY before returning to positive territory by year end.

I was trying to make sense of that in terms of the retail cycle, but couldnt really!

I am interested because my DCF valuation for BRG was based on the last years FCF, but obviously if I now reassess extrapolating the fall in FCF to negative then the valuation goes out the door!

I also notice the EPS seems to be the opposite, first half results are usually significantly more than half of the FY results - which seems more in line with retail cycle.

Overall my inclination is to sell, on all my metrics they are looking over valued and I cant really see enough potential growth to see them revert to mean that way so a fall in price seems more likely to me.

 

[hiddencow]

They make a lot of sales to retailers for the Christmas period and collect the cash in 2H?

 

[galumay]

They make a lot of sales to retailers for the Christmas period and collect the cash in 2H?

mmm...but then how to explain the earnings being on the opposite cycle!

 

[hiddencow]

I haven't read the financials but what you've described sounds normal. Lots of sales for Christmas so first half profit is higher. Collect cash from suppliers on Jan so second half cash flow is higher.

 

[galumay]

Nice H1 result today. Business doing well, happy I got in when i did, i worried for a while I had paid too much, but the truism about paying a fair price for a good business resonates here.

 

[tech/a]

I am reassessing my holding in BRG and on looking through the H1 report I am a little confused, operating cash flow is negative for the half, which is obviously not a good thing, but it looks like historically it is negative often in the first half of the FY before returning to positive territory by year end.

I was trying to make sense of that in terms of the retail cycle, but couldnt really!

I am interested because my DCF valuation for BRG was based on the last years FCF, but obviously if I now reassess extrapolating the fall in FCF to negative then the valuation goes out the door!

I also notice the EPS seems to be the opposite, first half results are usually significantly more than half of the FY results - which seems more in line with retail cycle.

Overall my inclination is to sell, on all my metrics they are looking over valued and I cant really see enough potential growth to see them revert to mean that way so a fall in price seems more likely to me.

Nice H1 result today. Business doing well, happy I got in when i did, i worried for a while I had paid too much, but the truism about paying a fair price for a good business resonates here.

Amazing how a rising share price alters perception.

 

[galumay]

A typically snide and inaccurate remark from you Mr Duck.

In the first post you quote I was trying to understand the cash flows in the different halves in the context of my calcualations of IV.

In the second post you quote I am commenting on the h1 report for this year and adding some commentary about my thoughts on the price I paid for BRG.

My perception hasn't changed at all.

 

[Klogg]

Amazing how a rising share price alters perception.

I would suggest that a good set of results has changed perception, if it has at all.

 

[Ves]

I would suggest that a good set of results has changed perception, if it has at all.

I think in some situations that could be a bad thing too! *hides*

 

[tech/a]

A typically snide and inaccurate remark from you Mr Duck.

Oh I don't know about that but thank you anyway.

 

[Ves]

Oh I don't know about that but thank you anyway.

To be fair, I thought your comment, was generally very applicable when looking at the way most people view the market.

 

[galumay]

To be fair, I thought your comment, was generally very applicable when looking at the way most people view the market.

To be fair, yes it possibly was applicable to the way most people view the market, BUT, it wasnt directed at most people. It was pure trolling and I was silly enough to bite. More fool me!

 

[galumay]

Good result for BRG, Australia particularly strong, but all segments growing. Been a very strong performer in my SMSF.