JB Hi-Fi reported first-half FY17 underlying net profit of $125.4 million, ahead of Ord Minnett’s forecast of $116.8 million due to strong sales and margin performance at the electronics and appliances chain.
The key area of surprise was the strong sales growth and earnings before interest and tax (EBIT) margins in JB Hi-Fi Australia, while JB Hi-Fi’s New Zealand business and The Good Guys were slightly below our forecast.
The strong performance continued into the new calendar year, and the company upgraded FY17 sales guidance to $4.33 billion from $4.25 billion previously. JB Hi-Fi also introduced guidance for FY17 net profit in the range of $200-206 million. Following the result, we have increased our normalised EPS forecasts by 4.0% and 3.0% for FY17 and FY18, respectively. We see upside risk to the company's upside earnings guidance, leading us to reiterate our Accumulate recommendation and raise our target price to $32.00 from $31.00.
The acquisition of The Good Guys provides valuation support for JB Hi-Fi, with forecast earnings growth to be strong for the medium term as synergies are realised, in our view. Furthermore, JB Hi-Fi’s operating performance in both the second half of FY16 and into FY17 has been strong, delivering sales growth and EBIT margin expansion.
There are execution risks, especially with the significant number of JV partners that are leaving The Good Guys, but we are confident it can be well managed due to the improved trading in January, the maintenance of separate head offices and cultures, and increasing confidence in JB Hi-Fi management.