Speculation of a Myer Holdings takeover was rife this week after Solomon Lew’s Premier Investments emerged with 10.8 per cent of the struggling department store. Commentators and brokers opined that Myer is in “play” after Lew pounced.
Predicting Lew’s intentions for Myer is tough. The canny ragtrader has a habit of suprising the market and making life tough for other suitors, as when he built a blocking stake in David Jones and used it as leverage in the Country Road takeover.
My sense is Lew is using the same tactics with Myer, possibly to block South African giant Woolworths Holding (owner of David Jones) in a takeover. Perhaps the end game is a David Jones / Myer merger, to rationalise Australia’s overcrowded department-store sector.
I nominated Myer as a takeover candidate last year, but have been wary on department-store stocks for several years. Like print media, department stores will die a slow death as consumers favour niche offerings, foreign retailers and online stores such as Amazon.
I’m more interested in what Lew’s move means for Premier Investments and Breville Group. The latter has had scant commentary about the implications of a Myer takeover. It would be positive for Breville, which has good prospects under new management.
Premier has a long-term holding in Breville with a 27.5 per cent stake worth about $365 million. Logic suggests Premier would need to sell this investment, to free up cash to fund a Myer takeover – a move that would open up Breville’s share register.
Breville has an improving outlook with or without a Premier-led Myer takeover. The company is rapidly expanding its innovation capabilities, global footprint and quickening its new product development cycle.
To recap, Breville makes, markets and distributes small electrical kitchen appliances. The company is known for its toasted-sandwich makers, coffee machines, juicers and a range of other kitchen equipment. About three-quarters of sales are offshore.
Breville does not get enough recognition for its design-thinking and global operations. A capacity for innovation has helped Breville take on the world’s largest appliance brands and deliver high returns over a long period. It is rare for Australian companies to do as well, for so long, in intensely competitive global markets in manufacturing.
Breville now sells in 65 countries through distributor partnerships, or has worldwide partnerships with multinationals, such as Nespresso (through Breville’s coffee machines).
The company’s return on equity (ROE) has averaged above 20 per cent since 2009-10 – a remarkable performance in manufacturing. A high and rising ROE is a hallmark of exceptional companies and usually a precursor to a rising company value and share price.
Breville’s 10-year total shareholder return (assuming dividend reinvestment) is almost 20 per cent (notice how ROE and share price performance are so linked!). The one-year return is 35 per cent after Breville rallied from a 52-week low $7.12 to $10.26.
Chart 1: Breville Group
Source: The Bull
Breville, due for share-price consolidation after recent gains, has an improving medium-term outlook. The company is investing more in research and development and building a genuine global presence rather than being mostly an Australian exporter.
Breville said last year that it would increase R&D and marketing from 8 per cent of sales to 12 per cent and align the group behind global/local go-to-market models.
That includes strengthening its sales and marketing capabilities in offshore markets, expanding into new channels and increasing penetration in existing ones.
Another element is building a stronger platform to support the strategy: an organisational restructure to facilitate its global strategy; upskilling of key capabilities; streamlined inventory management; and investments in technology.
Essentially, Breville is turning five independent supply chains into one streamlined global supply chain and building one global customer-support centre. That will drive efficiency gains and enable Breville to launch a product simultaneously worldwide.
It’s a smart strategy: get the front-end right with a true global focus for products and align the back-end operations to support those global ambitions. Breville confirmed the strategy is on track in its FY16 full-year result and the market liked it, judging by price gains.
Still, I doubt the market fully understands what Breville is doing. The company”s strength has been understanding customer needs, innovating and building a higher-margin brand that stands out in a commoditised electrical appliances market.
The new strategy builds on that strength rather than trying to fix something that is not broken. I see the strategy as making Breville more agile and streamlined for a global market, and able to respond rapidly to changing consumer tastes and launch and service one product in dozens of markets.
Watch the market’s confidence in Breville’s transformation strategy grow this year. This strategy is about making a good even company even better; Breville’s previously high growth rates were not too shabby, so CEO Jim Clayton has much to work with.
If he can take Breville up a gear with more innovations, faster earnings growth will follow and Breville’s intrinsic value and share price will rise.
The market has mixed views on Breville. Broker recommendations average between a buy and hold. A median share price target of $9.16, using consensus forecasts, suggests Breville is full valued at $10.28 and getting a touch expensive.
Breville looks a good stock to buy on price weakness, for investors who want to add small-cap exposure to portfolios. It need to consolidate recent price gains and continue to show that the transformation strategy is working.
Having Premier Investments off the Breville share register would be another positive, but the company’s continued re-rating is not conditional on market machinations.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at March 30, 2017.