Beacon Lighting (ASX:BLX): One of our favourite ASX retailers with strong upside potential

Beacon Lighting (ASX:BLX) flies under many investors’ radar, but it really shouldn’t. The family-owned company sells lights and fans to retail and trade consumers and is the largest company in its industry. It has a proven track record of growth and has more catalysts to come.

Beacon Lighting’s track record

Beacon Lighting listed in 2014 at 66c a share. It opened its first store in 1967 and slowly expanded over time – owning 71 owned stores, 14 franchised stores and four commercial sales stores by the time it listed in 2014.

The company was founded by Ian Robinson who remains Executive Chairman and his son Glen is now the CEO, having worked for the group since 1994 and having been in the top job since 2013. The company’s mission is ‘to brighten our customers’ lives with exciting products that are environmentally friendly and fashionable through expertise and unparalleled service’.

Since listing, Beacon has not raised a cent in capital and is still 55% owned by the Robinson family. At the time it listed it had $11.5m in net profit and $17.2m EBITDA on sales of $150m. It had consistent 15-20% annual profit growth since 1995. Since listing there has been further expansion.

Nearly a decade on, it delivered $312m in sales during FY23 and a $33.6m NPAT. It has grown its sales 34% and its profit by 107% in just the last 4 years.

Beacon now owns 119 stores and 2 franchised stores. It has avoided supply chain issues because it is a vertically integrated business that controls its own chain. Thus, its gross profit margin has been over 65% for 5 years now.

In FY23, Beacon paid a dividend of 8.3c a share representing a yield of 4.7% at the current share price. It has a cash balance of $28.0m and net cash of $8.4m. It has relatively modest capex of $11.6m, which is less than 4% of sales. On top of all this, it has a loyalty program with 900,000 people (over 3.5% of Australia’s population).

BLX shares are up 35% in the last 12 months and over 120% in the last 5 years. It must be doing something right.

Beacon Lighting (ASX:BLX) share price chart, log scale (Source: TradingView)

So what is next?

We all know that consumers spent more on home improvement products during the pandemic. And this has inflated Beacon’s sales during the COVID years. But, while some companies with inflated sales had them crash back to earth, this has not been the case here.

Furthermore, there are several catalysts going forward. Beacon will inevitably continue to generate good results. It made $164.9m in 1HY24, another record, and an $18.1m NPAT.

In the longer term, the company is hoping to capitalise on broader trends in the lighting industry, like sustainability and energy efficiency. We think the latter will be relevant given the current highs in electricity prices.

We also think that Beacon can continue to expand in Australia and overseas. At home, the company thinks there is potential for over 180 stores based on store network research. And overseas, it has set up showrooms and warehouses in Hong Kong, the Netherlands, Germany, China as well as three in the US to attempt to penetrate the market with its products.

No, you won’t be seeing Beacon branded stores over in the USA, but it will sell into local lighting stores, which tend to be small, family-owned businesses (one example being Lamps Plus) as well as through Ecommerce outlets (Amazon in the US and TMall in China and Hong Kong).

Consensus surprisingly negative

Analysts covering Beacon Lighting aren’t optimistic with a target price of $2.33 (a discount of over 10%) and forecasting a profit of only $29m for the full FY24 (down from $33m a year earlier). However, sales for FY24 are expected to slightly increase (to $317.1m) and again in FY25 to $342.8m (a gain of 8%). The company’s profit is expected to stagnate, nevertheless.

Why is consensus so negative towards a company that is defying expectations? We think there are three issues. First, supply chain issues may hit Beacon, with the company having some of its manufacturing in China – but crucially, not all. Second, fears that consumers will cut back on spending because of the global economic slowdown. And third, that BLX will see an impact the depreciating AUD given most products sold are purchased in USD. Obviously, these have not impacted the company just yet, even though we are over 2 years into the post-pandemic company. And there are the catalysts we have noted above.

So, keep your eye on Beacon Lighting. You may not gain as much than if you bought a micro-cap explorer and it became the next Chalice (ASX:CHN), although it is a solid business that presents far less risk and offers clear upside going forward.

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