JB Hi-Fi’s Good Guys play gets approval from analysts

JB Hi-Fi’s Good Guys buy has won broad support but many analysts remain concerned about the integration process.

JB Hi-Fi is buying rival electronics and whitegoods chain The Good Guys.

The investment community has given a thumbs up to JB Hi-Fi’s $870 million takeover of The Good Guys that will transform the retailer into the nation’s leading player in the consumer electronics and appliances sectors, but raised concerns over execution risk and the departure of key Good Guys store managers.

The key risks revolve around integrating The Good Guys into JB Hi-Fi, while many analysts also focused on the fact that The Good Guys was expected to have flat sales and earnings in 2017 despite buoyant times for the consumer electronics market.

JPMorgan and UBS upgraded their outlook for JB Hi-Fi to reflect the $15m to $20m in synergies flowing from the deal and promises that the takeover should be almost 12 per cent earnings per share accretive to JB Hi-Fi as it incorporates The Good Guys 101 stores into its Australian and New Zealand network.

“The acquisition of The Good Guys provides valuation support for JB Hi-Fi with forecast earnings growth to be strong for the medium term as synergies are realised,’’ said JPMorgan analyst Shaun Cousins, who upgraded his view on the stock to overweight from neutral.

Mr Cousins noted the execution risk around the recent restructure of The Good Guys before it was sold to JB Hi-Fi, namely the buyback of 55 Good Guys stores from joint venture partners. Following the restructure, management of 30 of the 55 partly owned stores have left the retailer, with the remaining 25 selling out but staying on in the short term.

It is the future of these stores that has created uncertainty among investors, with JB Hi-Fi having to find and train new store managers.

“While there are execution risks, especially with the significant number of joint venture partners that are leaving The Good Guys, we are confident it can be well managed due to the presence of Michael Ford (chief executive of The Good Guys), the maintenance of separate head offices and cultures, and increasing confidence in JB Hi-Fi management,’’ Mr Cousins said.

UBS analyst Ben Gilbert, who upgraded JB Hi-Fi to a buy, said there was “material upside’’ in the integration of the business, and he felt the synergy target of $15m-$20m was conservative.

“The deal makes strategic sense,’’ he said, “but is not without risk given The Good Guys is in the midst of a fundamental shift in the company operating model. Benefits from scale, market consolidation and conservatism in JB Hi-Fi’s expectations leave us positive on the deal.”

Goldman Sachs analyst Adam Alexander called the takeover “logical’’, with some strategic merits including striking better deals with suppliers. “This will provide opportunities to improve buying terms among other expected synergies,” he said.

JB Hi-Fi shares are in a trading halt. The takeover will be funded through a $394m capital raising and a new $450m debt ­facility. New shares will be offered to institutional and retail investors at $26.20 a share, a 9.2 per cent discount to the group’s last traded price.