You could argue this is just another boring cyclical moatless company that’s too big to slip under the radar of most instos and too small to exert any real influence on its market – but only if you like being wrong. Now I get it - this is a retailer and so half the audience has already moved on. But I think some retail gets a bit of a hard time.  Yes they can be cyclical, it can be hard to build effective moats and there are loads of examples of poor management killing capital.  But I think we're lucky in Australia to have so many examples of excellent bricks and mortar (and omnichannel) retailers, such as JB HiFi, Baby Bunting, Nick Scali, Bapcor (historically) and Shaver Shop (early but it's on the way – I could look silly when it reports tomorrow). Beacon sits comfortably among these names.

If you had a jumped on Beacon at its IPO in 2014 and held until now you would be up 5x at its recent high. In addition you would have had more than half your cost base returned to you in the form of dividends. That’s a ten-bagger in my book.

Lights and fans - it's not the world's sexiest business. It would of been back in the late 1800s. Beacon would of been high-growth tech distributor in those days, but it's a long time since then. However, lights are a resilient business. Obviously they first and foremost serve a utility function. But beyond that they have a very important and under-rated decorative function; in that they are a key way we differentiate our homes. They are going to benefit from a housing boom but we also pimp our homes between cycles and lights are seen as an important factor in this. Additionally after a long period of very little innovation in globes, the last ten years has seen an explosion in new tech, to reduce power bills and damage to the environment.

So what makes Beacon that good? Firstly, the metrics are strong. They've provided history since 2012 and revenue has grown every single year. Gross margins are consistently mid-to-high 60s, which suggests they have built a strong moat. Return on Equity hasn't been less than 20% and is more usually in the 30s. ROIC is similarly high. They've never reported an impairment writedown, they have no net debt, the balance sheet looks rock solid and earnings convert to cashflow in a reliable way. 

But that all speaks to history and although it shouldn’t be discounted it can’t be relied on to predict the future. So what are its prospects? They currently have 118 stores and are targeting a network of 175 stores in the long term – that target continues to grow as city’s sprawl and regional towns grow. The other factor that is increasing that target is a focus on attracting the trade market (which I’ll come back to), meaning suddenly revenue per store can grow substantially and so a smaller population base can then support a new store.  

One of the things about them is their decks look very similar today compared to when they IPO’d. The layout, the metrics, even some of the photos are consistent from one deck to the next. So either their IR/Finance/Marketing teams are really lazy or there’s a clear vision for management who are laser focussed on where the business is headed, how to get it there and are methodically going through the process of doing so. One of the key focusses of their presentations is always cost, which seems obvious but somehow gets missed with a lot of other companies, and indeed their record of ensuring top line growth flows to the bottom line is impressive.

I mentioned the growing Trade business focus; in the most recent set of results this grew 20% vs pcp. Although they don’t separately disclose the figures they believe trade could be the size of their existing retail business within five years. It’s more than just telling sparkies they’re an option. They are opening stores earlier to accommodate them, have a trade club and have appointed an industry expert to head the segment.

The other leg of this business that is getting traction is overseas, where they’ve been operating on a small scale for years but are now seeing start to scale. Whereas previously this segment was largely B2B they are increasingly adding a B2C offering. I like the fact they’re being very measured in how they do this and not committing to a large scale store rollout, crossing their fingers and hoping ‘they will come’. Instead they’re selling to large format stores through sales agents in various territories. If they can build a brand and the market is there, then they can look to scale through their own store netwok.

There are some other parts to this business like eCommerce (but who doesn’t focus on online sales these days) and the Property arm that is taking ownership of new sites they’re building in but you get the idea.

Even though it telegraphed an excellent half year result it sold off subsequently and in part I think this was due to acknowledging it’s GM of 70% was probably a high water mark and will normalise back into the 60s due to FX movements and freight costs. But that’s very short term thinking. I think this business could do three times current revenue within five years, which – with operational leverage – is going to mean it would multibag again. However, that’s an aggressive assumption and my valuation doesn’t assume anything like that. It only factors in a CAGR of 10% (the historical average since 2012). If that’s all it does and keeps paying a healthy dividend I’ll still be happy.

[Held]