New US Partnership With Home Depot Will Expand Market Reach

Key Takeaways

• Expansion of the store network and a focus on trade sales are set to increase market reach and customer base, boosting revenue and stabilizing margins.
  
• Innovation, international market growth, and strengthening e-commerce capabilities are key strategies to enhance revenue and drive diversification.
  
• Rising expenses and competition, along with economic challenges, strain Beacon Lighting's profitability and market position, risking growth in domestic and international markets.

Catalysts

Beacon Lighting Group Limited retails lighting products in Australia and internationally.

• The company is expanding its store network with a target of reaching 195 stores, including opening 5 new stores in FY 2025, which is likely to boost future revenue through increased market reach and customer base.
  
• A significant increase in trade sales, which surpassed $100 million for the first time, indicates a strong and growing partnership with trade customers. This shift towards trade sales, which the company aims to increase to 50% of total sales by FY 2028, is likely to improve revenue growth and stabilize gross margins due to improved buying power and economies of scale.
  
• The development and launch of 500 new products in FY 2024, with plans for 650 new products in FY 2025, demonstrate the company’s commitment to innovation. These efforts can attract both retail and trade customers, potentially increasing revenue and supporting healthy gross margins.
  
• Growth in the international market, particularly through the Hong Kong business and new partnerships in the U.S. with major retailers like Home Depot, indicates new revenue streams and diversification across global markets.
  
• Strengthening e-commerce capabilities, as evidenced by a 47% increase in online trade sales and a redesigned trade website, suggests a strategic focus on digital sales channels which are expected to drive future revenue growth.

Beacon Lighting Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Beacon Lighting Group's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.3% today to 10.2% in 3 years time.
• Analysts expect earnings to reach A$40.3 million (and earnings per share of A$0.18) by about February 2028, up from A$30.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$35.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2028 earnings, down from 25.6x today. This future PE is greater than the current PE for the AU Specialty Retail industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

Beacon Lighting Group Future Earnings Per Share Growth

Risks

• Rising living costs, higher interest rates, and lower consumer confidence in FY 2024 have impacted consumer spending, which could continue to affect Beacon Lighting's retail sales and revenue growth.
  
• Despite an impressive gross margin, operating expenses increased due to inflation, higher property outgoings, power costs, and other government charges, potentially pressuring net margins and profitability.
  
• The company's international expansion, particularly in the U.S. market, has been challenging, with continued sales declines affecting overall international earnings performance.
  
• The impact of the AASB 16 lease accounting standard and rising finance costs due to interest and lease accounting have placed additional financial strain, affecting net profit margins.
  
• Increased competition and market consolidation in the lighting industry could erode market share and pressure earnings if Beacon Lighting is unable to effectively capitalize on opportunities or fend off competitive pressures.

Valuation

• The analysts have a consensus price target of A$3.139 for Beacon Lighting Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.5, and the most bearish reporting a price target of just A$2.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$395.9 million, earnings will come to A$40.3 million, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$3.38, the analyst price target of A$3.14 is 7.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.