EUR 850.00 For Business Accounts Only

Morningstar | Ongoing European Expansion to Drive Strong Earnings Growth for Breville. See Updated Analyst Note from 17 Dec 2018

Shares in narrow-moat rated Breville are now only 15% overvalued relative to our unchanged AUD 10.00 per share fair value estimate, after having fallen over 20% during the past three months. Our fair value estimate implies a forward P/E of around 20 times, which we believe is reasonable given Breville’s strong earnings growth outlook. Our earnings estimates are unchanged, and we continue to project EPS growth of 12% per year on average during the next five years. Our estimates incorporate around 10% annual growth in North America, underpinned by new product launches and expansion into new categories, along with a continuation of the current low- to mid-teens growth in ROW, which assumes a successful launch of the Sage brand in Germany, Austria, Benelux, Switzerland, and neighbouring countries.

During 2018 the company launched the Sage brand in Germany and Austria, and whilst still in early stages of the launch, the initial feedback has been broadly positive. The Christmas holiday season will allow for a much clearer performance assessment in these regions. The products are on the shelves of approximately 700 retail outlets, with marketing efforts in full swing, including in-store installations, digital campaigns, and promotion events. During fiscal 2019 the firm will expand into Netherlands, Belgium, and Switzerland, and beyond fiscal 2019, Italy, Spain, and France will be the main targets.

The business is continuing its transformation program, a key component of the firm’s ongoing commitment to larger investment into marketing, research, and development. Investing heavily in the brand will help ensure the narrow moat is maintained and will underpin the successful expansion into Europe. The firm is aiming to spend 12% of sales on marketing (on a long-term sustainable basis) and R&D, which is almost double the 7% spent on average, prior to commencement of the program. Within the increased marketing budget, the firm will pursue one of three strategies for each new product launch: (1) Enhanced, which is the basic go-to-market package and includes the digital assets, point of sale material, and digital and social assets mainly used for a category expansion product, (2) Priority, which includes all the elements of “Enhanced” but adds video content, and (3) Brand launch, which includes the “Priority” execution with increased spend on media, and a launch campaign. With a disciplined marketing and product launch framework, we believe the firm is well placed to leverage its brand power to continue penetrating new European regions.