I admire small Australian companies that take on global markets and succeed in industries where the odds are stacked against them. Companies that deliver good results over long periods, innovate and take risks, and usually prove the doubters wrong.
Breville Group is an example. The kitchen appliances maker is one of Australia’s great small-cap companies. Breville’s annualised total shareholder return (including dividends) over 10 years is 44 per cent – a return that star tech companies would kill for.
Breville’s Return on Equity (ROE) – a key performance metric I assess – has comfortably exceeded 20 per cent since FY11 and is a reason for its strong share-price performance.
Better still, Breville is genuinely global with only a fifth of its earnings made in Australia and New Zealand. About 60 per cent of sales come from the United States and 14 per cent from Europe. Few small-cap Aussie companies have built such a global footprint.
Breville, on paper, should not have done as well as it has. Kitchen appliances, for the most part, are a commoditised market. I can buy an $8 toaster at K-Mart and pay more for a loaf of fancy sourdough bread that goes in it. Or $7.50 for a China-made sandwich maker.
Global giants should have crushed Breville. In theory, this market is about scale: multinational companies producing at the lowest cost in a market driven by price. A small Australian company seemed an unlikely star in the kitchen appliances manufacturing sector.
Yet Breville continues to beat market expectation. The company has shown how a focus on innovation can differentiate products, enabling them to compete at different price points. Breville morphed into a design company that deeply understands its customers.
Its transformation came as Australians looked for stylish appliances that complemented their expensive kitchens and homes that had increased in value. The humble kitchen became the centrepiece of homes and demand for innovative kitchen appliances increased.
Some of this column’s readers probably own an expensive KitchenAid Mixmaster, Smeg kettle or Breville coffee machine. Some prefer a $300 KitchenAid toaster in a modern colour that matches their kitchen décor and impresses their friends. An $8 K-Mart toaster won’t do that.
In spite of its long-term record, Breville shares tumbled in September when the broader sharemarket got the jitters and investors fretted about slowing retail sales growth here and abroad. Breville fell from almost $14 in August 2018 to $10.30 in January 2019.
Some analysts doubted Breville’s new strategy and wanted to see it was working. The company in 2016 said 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 included strengthening its sales and marketing capabilities in offshore markets, expanding into new channels and increasing penetration in existing ones.
Breville set out to build a 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 was transforming into a truly global company with a structure to match, from an Australian company that exported to lots of markets.
It was also speeding up its innovation cycle so that it could get new products to new markets faster and drive a step-change in earnings growth.
I wrote in The Bull in March 2017 that the market did not understand Breville’s strategy and worried more about the impact on costs than the capacity for greater innovation and targeting of global markets. The market’s short-term focus never ceases to amaze.
I wrote at the time, when Breville was $10.28: “Watch the market’s confidence in Breville’s transformation strategy grow … This strategy is about making a good 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.”
Breville rallied sharply in 2017 and after its sell-off in the fourth quarter of 2018 trades at $15.27. Investors who backed Breville’s new strategy have watched the share price increase by a third in the past three years – in a slowing global retail sector.
Breville shares soared to an all-time high last week after reporting an almost 20 per cent lift in first-half profit to $43.5 million. Strong sales growth in Europe and North America drove the gains and the market responded with a double-digit share-price lift.
It was a terrific result and proof that Breville’s strategy to launch more products to a larger market (through global expansion) is lifting its growth trajectory.
Breville shares are due for a pullback or pause after such strong gains. But the 1-3-year outlook is compelling as the company sells more juicers and coffee machines in the US and expands in Europe, particularly Germany, through its Sage brand. The company’s newer tea-maker appliance should be another growth driver.
Portfolio investors should watch and wait for better value in Breville. An average share-price target of $13, based on the consensus of seven broking firms, suggests Breville is overvalued. I’d argue the stock is fully valued given its near-term earnings potential.
Breville’s interim result is further confirmation that it remains one of the market’s highest-quality companies and a stock for long-term investors to buy on any price weakness.
Chart 1: Breville GroupSource: 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 February 20, 2019.