Equity Strategy
21 February 2024
Opportunity Brewing
Breville – A High-Quality Cyclical with a Strong Track Record

Early in reporting season, we highlighted our intention to add exposure to quality cyclicals if an opportunity arose. 

With potential rate cuts globally, adding a quality cyclical stock positions our portfolio to benefit from a stronger consumer in 2025. Following a pullback in its results, we've added Breville Group Limited (BRG) to the Focus Portfolio with a 2% weighting.

To fund this, we've trimmed our active weight in CSL to 6.5%, leaving us with a small active position (vs its ASX 300 index weight of 5.8%).

Adding Breville (BRG) 2% – Double Shot

Breville (BRG) engages in the development, marketing and distribution of small electrical appliances for the consumer products industry. The company’s products are sold in Australia (a leading market position along with Sunbeam), North America, New Zealand, Europe and Asia-Pacific.

BRG fits our characteristics of a quality cyclical. While its earnings have an element of cyclicality, the company has demonstrated its ability to grow earnings above market over the cycle.


BRG is a High-Quality Cyclical

i.  High quality management team – CEO (Jim Clayton) has driven a very successful growth strategy.

ii.  Resilience – In a tough 2 years, BRG has continued to grow earnings, a remarkable feat given the backdrop of macroeconomic and post-COVID distortions.

iii.  Margins consistency – BRG has maintained margins over the cycle, demonstrating the levers BRG has at its disposal. 

iv.  Balance sheet – BRG is expected to be net cash at the end of FY24, reducing net interest expense but also providing dry powder for the next few years.

v.  Return on Invested Capital: Strong ROIC of 20% (FY24).


BRG has a Strong Track Record of Growing Earnings

1   New product launches:

Focus on innovation: BRG's sustained investment in research and development (R&D) has consistently yielded successful product launches. This strategic focus on innovation ensures a healthy pipeline of exciting new releases catering to diverse geographic preferences and expanding product categories, fueling future growth.

BRG's performance has undergone a significant transformation under CEO Jim Clayton’s leadership. Prior to 2016, the company saw steady but moderate growth, with average annual growth of 8% (2011-2016). Since then, revenue has grown ~14% per annum or by 2.5x (2016-2023). This shift is a result of Clayton's strategic investment in R&D, technology and marketing. While margins have fallen on the back of higher expenses, the increase in R&D has fueled growth. 

2   Geographic expansion:

BRG boasts a proven track record of successfully entering new markets, establishing a strong presence in the US, Europe and APAC. This serves as a springboard for further growth as the company strives to solidify its position in existing markets while venturing into new ones.

Since FY19, BRG has aggressively pursued its globalization strategy, entering 17 new countries, particularly in Western Europe, South Korea and Mexico. Management estimates it is halfway through this strategic expansion, with an anticipated completion timeframe of 8-10 years.


BRG's geographic diversification mitigates economic dependence, fostering earnings resilience. Spreading revenue across the Americas, Europe, and APAC ensures regional fluctuations have a reduced impact. This multi-market strategy also exposes BRG to diverse consumer preferences, expanding its reach and fueling growth opportunities. 

Figure 1: BRG’s earnings growth has supported its share price over the last 10 years
Figure 2: BRG has grown revenue across all geographies in the last 5 years

China/India option

BRG's existing geographic diversification is impressive, but untapped potential lies in China and India. These colossal markets, with over 2.5 billion consumers combined, offer significant long-term earnings growth potential. While cultural nuances and regulatory hurdles exist, strategic entry unlocks access to a vast, growing middle class eager for premium appliances. None of this growth is in consensus, which provides upside surprise if BRG can execute. 

3   Margin expansion:

BRG has successfully navigated the balancing act of margin expansion. Economies of scale gained through global expansion have naturally contributed to this growth. Another driver of margin expansion lies in the company's premiumisation strategy. By focusing on higher-value product segments and leveraging its strong brand reputation, BRG has commanded stronger gross profit margins.

Figure 3: Gross margins have been trending up as BRG has scaled

Balance Sheet Improvement Underappreciated

BRG's balance sheet has improved significantly over the last half, driven by effective inventory management and a subsequent reduction in net debt.

Inventory optimisation

At the 1H24 result, inventory levels have been reduced by 18% year-over-year and 7% below consensus expectations, reaching $380 million as of December 2023.

Figure 4: BRG's inventory levels are normalising and should remain low (relative to sales) over the medium term

Net debt reduction

Net debt has fallen from $212.2 million in December 2022 to $97.5 million in December 2023, and further down to $34.7 million by January 2024. This represents an impressive reduction of 83% within a year.

Figure 5: BRG's net debt is expected to fall with net cash expected by FY25

Balance sheet to get stronger over next 6 months

The positive trend is expected to continue, with expectations of inventory shrinking further by June.

Net debt is also anticipated to reach near-zero by June 2024, eliminating the current heightened interest expenses and further strengthening the company's financial position.


Valuation Premium Reasonable

While BRG trades on a premium valuation, at a forward P/E of 28x, this is justified given the quality of the business and the potential growth over the medium term. BRG trades at around its 5-year average on a forward P/E basis, but with earnings expected to grow 13% per annum over the next few years (FY24-FY26), and risk to the upside on earnings with a global rate cut cycle potentially looming, BRG's current valuation is reasonable. 

Figure 6: BRG's valuation is reasonable compared to its 5-year average
Figure 7: ISG Quality framework - Breville (BRG)
Durable competitive advantage, pricing power Breville (BRG) is a leader in the Australian market (along with Sunbeam) and has a growing share overseas which is owed to a number of competitive advantages. These include a strong brand name that is trusted by consumers and is synonymous with: premium quality, its established distributor/retailer relationships and its global scale. As a result of a sustained focus on innovation and product quality, the business has a high degree of pricing power which is evidenced by its aversion to discounting and its high/stable gross margins over time.
Supportive industry structure, structural tailwinds While the household appliance category is competitive and relatively mature in nature (offering ‘GDP plus’ growth), there are a number of structural growth levers available to BRG, such as innovation/new product launches, new tech (i.e. connected ovens, beanz.com), and expansion into higher growth/less penetrated markets (i.e. China, India)
Attractive business model, high ROIC BRG benefits from a highly flexible business model. The business is able to employ a high degree of discretion over its costs (i.e. marketing, NPD) depending on trading conditions, which allows margins to be well maintained over the cycle. The business enjoys double digit EBIT margins which drives an attractive ROIC of >20%.
Strong management team BRG is led by an experienced, well-regarded, and stable management team. Jim Clayton has proven himself to be an astute CEO since taking the role in 2015.
earnings growth
The company will generate low-mid teen EPS growth p.a. over the medium-term, which will primarily be driven by new product releases and launches/brand growth in new/relatively unpenetrated geographies.
Strong balance sheet Inventory and gearing is now relatively low and the balance sheet will move into a net cash position in FY25.

Source: Refinitiv, Wilsons Advisory. 

Trimming CSL -2%

Following a mixed result and unfavourable clinical trial news, CSL’s weight in the Focus Portfolio has been trimmed to 6.5%, which is a modest overweight compared to its ASX 300 weight of 5.8%.

Key points for trim:

  • CSL 112 fails to meet primary endpoint – the inability of CSL112 to pass its phase 3 trial has materially reduced CSL’s medium-term valuation upside (Wilse: by $91/share), thus lowering our total return expectations for the stock. CSL112 was by far the highest potential asset within CSL’s R&D pipeline and its read-out was a key catalyst that has now been removed. 
  • Core IG strength clouded by weakness elsewhere – our investment thesis is playing out as it relates to the core Behring segment, which has demonstrated strong top line growth in IG sales and positive momentum in the recovery of gross margins. However, this has been offset to a degree by disappointing results in the smaller Vifor (kidney) and Seqirus (vaccine) franchises amidst operational and structural challenges. 
  • Risk/reward now less compelling - while the well performing Behring segment is by far CSL’s most important segment and will (continue to) carry the group by contributing to ~80% of earnings growth over the next three years; with much of the CSL’s R&D pipeline upside now gone, and Vifor / Seqirus not contributing as expected, our conviction in the group as a whole has been tempered. With that being said, we retain a positive (overweight) stance overall based largely on the performance of the Behring segment. 
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Written by

Rob Crookston, Equity Strategist

Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.

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