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« Last post by galumay on December 14, 2022, 05:30:43 PM »
I have been thinking about taking an initial position in Beacon Lighting, BLX. It meets the criteria I look for in a business, its got a strong ROIIC of over 40%, a re investment rate of over 35% and FCF yield of nearly 10%. Divvy yield is 4.5% I dont think its particularly expensive, at around $1.97 it is trading at a discount to my range of value of around $2.40. Reverse engineering it implies growth of only 0.4% or 16c per share FCF compared to the current 19c.
My friend Chris VanAanholt knows the management team and speaks very highly of them and their integrity and motivation.
The biggest threat to the business is probably a downturn in the housing and construction sector, something that is certainly possible in the next couple of years. With such strong metrics BLX should be able to weather any negative economic cycle in the housing sector, of course it may become considerably cheaper if that eventuates.
a further risk is that the recent strong FCF and profit metrics are a one off result of Covid and are not indicative of a structural change in the business. Contrary indicators for this thesis is fairly stable revenue growth over the last 8 years, averaging 9%, the outlier was 2021 at 14.5% and 2022 looks to be a return to baseline with 5.5% sales growth and 8% EPS growth. The two covid outliers were definitely 2020 2021. The interesting thing is they have been able to grow gross & net margins thru 2020-2022. This means they were nimble enough to adjust the business for all of the issues, covid, supply chain, inflation etc. In saying all of that, the risk is that the roll off of the beneficial effects of covid on the business have not yet flowed thru, so we dont see them in the 2022 results, but 2023 reverts to mean and we could see EPS halve along with FCF. This would see a range of value around $1.50 by my calculations.
Another potential threat to the business is management losing their direction and starting to make poor capital allocation decisions, or embark on ambitious M&A activities. This seems possible but improbable given the high % of founder ownership of the business - the Robinson family hold 55% of the business. (top 20 hold 85%)
SO thinking about it probalistically, if the worst combination hits, housing spending roll off and post covid revert to mean, 10% chance $1, just one of these 10% $1.50, neither of them but business stagnates, 25% $2.00, business continues growth trajectory due to structural change and capital allocation, 35% $2.50, this and it gets run up by new investors on the back of these results, 20% $3.50 = 10c + 15c + 50c + 87.5c + 70c = $2.32 I give a stronger weight to the more positive outcomes just because of the history of revenue and earnings growth, the ROIIC and reinvestment rates and the management team.
Also the business has been operating since 1967, so over 50 years, the Lindy effect implies its likely to keep going!
The balance sheet is strong, only a small amount of debt and cash on hand is 2x debt.
BLX also dabbles in property management, from the AR -
During FY2022, through the Large Format Property Fund, Beacon Lighting acquired a 50% interest in large format retail properties in Modbury (SA), Bathurst (NSW) and Mildura (VIC). This property portfolio complements the other four large format retail properties which were acquired in FY2021. Currently, four of the properties are fully tenanted while the other three properties require further development.
Just realised the FCF is totally distorted by AASB 16 accounting, when the lease expenses are added back into operating expences where they belong, FCF is more than halved. This totally distorts my valuation for the business and I no longer consider it to have any margin of safety at current prices, in fact its grossly over priced relative to my re-calsulated FCF.
I am revisiting this decision because I really like this business so I am going to do some more thinking about it.
Current price implies FCF growth of 6%, which seems high for a retailer, but they have managed to grow EPS at just under 20% for the last 8 years, and revenue at nearly 9.5% (that alone is very telling, growing earnings faster than revenue is very unusual.)
FCF 2020 - 6.5c
2021 - 14c
2022 - 9.5c
8 years ago it was 2c so FCF has grown at over 20% also
So is the growth sustainable or is it some distortion of Covid etc? 2020 & 2021 certainly look like outliers, EPS growth of 37% & 67%, but that doesnt tell the whole story, as revenue in those 2 years only grew by 2.4% & 14.5% respectively. Somehow they grew gross margins by about 5% from 64% to 69% which was a big contributer to the increased EPS.
The company explanation was,
"The gross profit was improved by everyday pricing, improved procurement negotiations and favorable foreign currency movements."
Update 8/1/23 Ironically while I was slowly trying to talk myself into paying up a bit more for a position in BLX, the price has risen over 15%! So now I just sit and watch.
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