JB Hi Fi and hiding in dividends

Advertisement

JB Hi Fi is an interesting weather vane for the health of the retail sector. Analysts are assessing it as pretty well priced, given its weakness. Merrill Lynch has a neutral recommendation, saying that the net profit after tax was in line with expectations but that it was down 46% on the second half of 2010-2011. There was a note of relief that the company is reporting no further deterioration. JP Morgan has an underweight recommendation and has dropped its target price to $9.61.

“Despite relatively upbeat commentary regarding current trading, and the increases to our FY13 forecasts, we retain our Underweight recommendation given the following: (1) Strong share price performance over recent times. (2) Gross margins comments require further evidence of a sustained improvement. (3) The environment for discretionary retail remains challenged which could further weigh on the earnings outlook for JBH. (4) JBH continues to face several medium term challenges which will negatively impact sales and/or gross margins. While we recognise that industry consolidation represents a near-term opportunity for JBH, we suggest a number of risks exist for JBH both from the perspective of the short-term discretionary retail environment as well as longer-term structural challenges.”

The stock is on reasonable fundamentals with a forward earnings multiple of 9.4 times and a prospective net dividend yield of 6.8%. Deutsche Bank has a hold recommendation and a higher target price of $10, saying it is too early to call a bottom:

“Today’s result revealed that gross margins in the tail end of FY12 were not as bad as feared and remained better into FY13. However, we believe profitability will continue to deteriorate given costs are likely to grow faster than sales and discounting will probably remain aggressive. The business remains exposed to structurally challenged products and while it has overcome this previously by expanding into new segments (including IT), we have seen no evidence that there is another better category that fits with the JB format and brand. With the stock trading more than 50% below its peak and a short interest greater than 20%, we believe our concerns are reflected by the share price.”

Advertisement

The fate of JB Hi Fi is indicative of how good management is no protection in such difficult retail conditions and such a skittish market.The question is when do investors start looking for capital gain and start trying to pick the bottom. The strategy of hiding in dividend yield may be reaching its end, as UBS intimates in the global context:

“Following strong outperformance over recent months, the defensive and yield trade has to come under pressure as investors have begun to embrace some risk once again.
Defensive trades have looked stretched for some time, but have nevertheless been supported by the market’s thirst for yield and high level of uncertainty in respect of the economic and earnings growth backdrop.”

And Macquarie intimates in the local context:

Advertisement

“This puts “earnings certainty” stocks such as AGK, TWE, WOW, CCL and stocks seen to offer “defensive yield” such as SKI, APA, SYD, DUE, CFX, WBC, CBA, NAB, ANZ and WDC in the spotlight. These stocks have also outperformed the market considerably over the last 12 months and will be under pressure to deliver “income certainty”. Further, with the majority of stocks still to report their JunHY12 results over the next few weeks, we still believe there are further downside risks to FY12E (and FY13E) EPSg estimates.”

JB Hi Fi has a decent yield, but probably the bigger question is how accurate the bearish earnings multiple is. That in turn is a matter of valuiing the company’s management skills against the bearish conditions in retail.