BRG result

The result was 3% above my revenue number and 1% below my NPAT number; in my world, that’s within range. Listening to BRG mgt reminds me of the saying “Only the paranoid survive”. Always seems to be an issue: macro volatility, chip shortage, tariffs, wild swings in demand, not to mention competition. Luckily, these guys know what they are doing. I see the stock as fully valued atm with interest below $30.

I have one issue with BRG that has been bugging me for a while, and has to do with the cash returns on capital employed that I define as CFO-internal capex divided by shareholders' equity plus net debt. This measure I usually use for smaller caps, and it is a cash return on investment instead of a profit and loss one. More chance of picking up accounting funnies.

First is eps trajectory, nothing wrong with that. A 95% around trend is very stable growth.

Now we look at the cash return on invested capital. Cash is being absorbed somewhere and the trend is not favourable. Part of this is the swings in working capital. This adds to volatility. Ok that’s probably most of it, but that trend? So I had a look at the intangibles. What I am trying to discover here is whether BRG is under-expensing its intangible spend on R&D. That s/w spend is consuming cash, and maybe why the trend is poor, but maybe not being reflected in the P&L. you may remember a short report on TNE about the same issue a while back.

The following is disclosed intangible spend over the last five years. What is below is internal software development costs capitalised, and external acquisitions. Are these numbers clean, well, we don’t know; that’s what's disclosed. BRG intangibles on the balance sheet were $144m in 2020 and are now $451m, so an increase of $307m. External acquisitions of intangibles make up $154m and internal $163m. totalling $317m, almost the exact rise in intangibles. That means next to no write-offs. Understandable for external acquisitions, but there would be a write-off schedule (I would think) for internal software, maybe over 5 years. That adds to about $80m in write-offs that have not occurred. Pre-tax earnings have been $781m over the last five years so about 11% of profits have been overstated. Not the end of the world but aggressive accounting usually does not a great ending.

Interested in any comments or errors detected in my thinking. Im a holder at medium weight.

@OxyBBear yes, it was a great result, with EBIT growth, their key measure, at +10.5% just beating their 5-10% guidance range.

They had double digit revenue growth in CC across all 3 regions, and that helped them mask the massive programme they've been undertaking to mitigate US tarrif impacts by:

• building inventory (which protected 2H FY25 margins) - which of course has hit working capital and cash flow.
• retooling their 120V range to outside China (Mexico and SE Asia), from 15% now to 60% and targeting 80% by EOFY.

As ever, I am in awe of this management team. Despite the turbulence they've been managing, the results are steady as a rock, and this is the first time they've returned to >10 revenue growth in 3 years.

Of course, tariffs mean that there is uncertainty ahead for FY26, with the US their largest market. Originally, their response was to avoid the tariff impact by moving 120V out of China, but the White House has anticipated that by raising the reciprocal tariffs against all the manufacturing exporters, so there is nowhere to hide! But ultimately, there is a competitive game to play across the industry, and I think $BRG will do as well if not better than the competitors, and I would view any FY26 impact simply as a buying opportunity.

I sold down 50% of my RL position at the HY in Feb, when the SP ran up over $37, and I was worried about tarrifs. Today, at over $35 it is still fully valued. The great news is that there will be turbulence over the next year (tariffs, US consumer concerns, Europe etc.), and I fully intend to buy back in when the SP comes off.

I'll be updating my valuation after the flurry of reporting season is over - there's no rush. But as sure as night follows day, there will be an opportunity to buy this more cheaply.

$BRG continues to be one of my favourite stocks.

It's a busy day of results today, so I will offer my write up later, if there is anything useful to say.

Disc: Held in RL only