A spotlight on Beacon Lighting
One stock that had excellent performance on its first day as a listed company was Beacon Lighting (ASX: BLX) which had its IPO in April of 2014 with a $142m valuation.
The stock soared 60% from its 66 cent listing price to close the day at $1.07.
Beacon was established in 1967 as one store in Prahran, Victoria. It since has expanded to a portfolio of 71 corporate stores, 14 franchised stores and 4 commercial sales offices with an estimated 14 per cent market share in the Australian retail lighting industry. The firm is vertically integrated so that it controls all phases of the product supply cycle from development & design to sourcing, importation, distribution and merchandising. This allows the firm to cater its products to consumer demand, generate some pricing power and thus earn strong returns.
As one of the market leaders in the development of lighting fittings, ceiling fans and light globes it can differentiate itself from competitors such as Masters or Bunnings by unique and exclusive designs. This exclusivity coupled with branding generates an economic moat which protects the firm’s profitability.
The results speak for themselves with gross margins of 65 per cent in FY13. Return on equity is forecast to hit 30 per cent in FY14 and this should be achieved with little debt.
It is tempting to project high earnings growth for firms like Beacon and at times this is appropriate. It may be wise to be cautious in this case. Beacon’s growth targets include having a network of 125 stores and there are 89 (as of the prospectus date). Thus most of the firm’s growth has already occurred and whilst Beacon is establishing operations in solar energy products and an online presence, the former is difficult to value given its infancy and the latter may simply cannibalise current store sales.
Shining examples of quality businesses are a natural theme at Montgomery Investment Management, but we are careful not to become dazzled by the bright lights (all puns intended).
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
