Australia made headlines this week when it hit 25 million residents. The real news was buried: the population milestone came more than 20 years sooner than the Federal Government first expected.
It’s not the absolute number that matters most: Australia is still smaller than the US States of Texas (28 million) and California (39 million). Rather, it’s the rate: our population growth of 1.6 per cent was third-highest in the developed world in 2017, found NAB research.
Australia’s first Intergenerational Report in 2002 forecast 24.5 million resident by 2042. How remarkable that the Federal Goverment back then could get it so wrong. Or that policymakers and the community relied on wildly inaccurate population projections.
Companies generally benefit from population growth directly through demand for specific goods or services or indirectly through the effect on the economy. Capital city residents, of course, suffer from overcrowding and congestion, but that’s another story.
I have written before for The Bull on companies exposed to this population megatrend. The benefits of soaring population growth for Australian property trusts was also considered.
Stronger-than-expected population growth has implications across sectors. Retailers that sell goods for new housing formations are benefiting. Think Harvey Norman Holdings selling mid-priced furniture or white goods.
Population growth has State governments scrambling to upgrade city transport infrastructure. That’s good for Adelaide Brighton, Boral, CSR, James Hardie Industries, Fletcher Building and Brickworks in building materials; UGL, Downer EDI and CIMIC in contractors; and Lend Lease in construction. Or Monadelphous Group and WorleyParsons in infrastructure services.
Population growth is a tailwind for larger leisure and entertainment companies. More residents and visitors inevitably mean more people at casinos and other attractions. That’s good for casino operators Crown Resorts and The Star Entertainment Group.
The market, of course, is well aware of population growth and has factored it into prices. Also, never buy stocks on the basis of “top-down trends” alone. Many factors affect company earnings and valuations. Megatrends that are easy to understand can seduce novice investors.
Still, it’s remarkable how the market often underestimates the duration of megatrends. Investors get overly excited about a trend, pay silly prices and burn money. Then, lose interest in the megatrend just as it is starting to boost company earnings.
JB Hi-Fi well positioned
JB Hi-Fi (JBH) is a play on population growth and looks interesting after recent price falls. The former star has slumped from a 52-week high of $29.47 to $22.20.
JBH’s The Good Guys business has had weaker-than-expected sales growth and contracting profit margins. Poor sales of home appliances due to unfavourable weather conditions and price competition hurt JBH.
Full-year after-tax guidance was downgraded to $230 million from $235-$240 million. JBH is still performing better than most retailers but the market needed to see more sales growth to justify the company’s valuations and better performance from The Good Guys acquisition.
The bears say JBH should be avoided as competition from Australian and international retailers intensifies, hurting margins. Greater competition is clearly weighing on The Good Guys, which has had to lower prices – and thus profit margins – to compete with online rivals.
JBH’s underperforming New Zealand business is another headwind. Longer term, ongoing price deflation in electrical appliances will affect JBH’s margins. It needs big product launches, such as a new iPhone, to drive people into stores and pay full prices.
The bulls argue that JBH is still delivering solid like-for-like sales growth in its core electrical goods business and that it remains a preferred retail channel for gadget suppliers. Also, many synergies can still be derived from The Good Guys acquisition and JBH’s online business is growing rapidly, albeit off a smaller base.
The outlook will be clearer when JBH reports full-year earnings later this month.
I suspect the market is focusing too much on challenges at The Good Guys and not enough on the core business, which should contribute about 80 per cent of FY18 earnings. The Good Guys has its challenges, but JBH is well placed to drive sustainable earnings growth.
Population growth means more people consuming more gadgets and upgrading them. Australians, like those in other developed nations, cannot get enough of electronic devices for individual or home use (witness the growth in electronic home-assistant gadgets).
Only a fool would discount Amazon’s threat in Australia, but the e-commerce giant has shown it is not always cheapest in electrical devices and JBH’s in-store advice on higher-priced devices, such as laptop computers, remains a key selling point over online-only stores.
It all comes back to valuation. At $22.20, JBH is on a forecast Price Earnings (PE) of 11 times FY19 earnings. An average price target of $25.81, based on the consensus of 12 broking firms, suggests JBH is undervalued at the current price. Macquarie Group has a target of $28.80.
JBH has traded on a PE of 12 to 15 over the past four financial years. A forecast PE of 11 is undemanding for a company that still has a Return on Equity of around 25 per cent (and much higher in preceding years). That is exceptional for a retailer.
Longer term, there’s plenty of growth left in electronic devices as more home devices are internet connected and new personal gadgets are released.
And more people, of course, to buy them as Australia’s population rises.
Chart: JB Hi-FiSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/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 August 8, 2018.