Professional stays strong; DIY grows faint
- 1H22 net profit rose 10% yoy and formed 43% of our previous FY22F forecast. We deem this in line due to weaker US consumer spending.
- Milwaukee professional tools likely to drive revenue growth (c.20% p.a. in FY22F and 23F) and GPM expansion (c.50bp p.a.) due to its higher margins.
- Reiterate Add. We lower TP to HK$133.70 on c.5-8% cuts in FY22-24F EPS.
- TTI trades at 15x FY23F P/E, which has factored in the weaker US consumer spending and lower DIY demand.
Solid 1H22 results despite cloudy macroeconomic conditions
Techtronic Industries’s (TTI) 1H22 net profit rose 10% yoy to US$578m, in line with our/Bloomberg consensus, despite macroeconomic headwinds (inflation, component shortages and Covid-19 wave in China). 1H22 revenue grew by 10% yoy to US$70bn, continuously led by Milwaukee (professional tools, +26% yoy), thanks to further market share gains in cordless new products, while Ryobi (DIY tools, down c.10% yoy) was hit by hot weather that dragged down demand for outdoor products. TTI delivered its 14th consecutive year of GPM expansion of 50bp yoy, reaching 39.1% in 1H22, underpinned by strong Milwaukee sales (higher margin tools) and new cordless power tools for Milwaukee and Ryobi. EBIT margin stayed at 9% in 1H22 despite a surge in raw materials prices and logistics costs, thanks to the company strategically stocking up on key raw materials at end-2021 and excellent supply chain management.
2H22F revenue growth to slow down but GPM likely to improve
Management guides for revenue growth to remain flat in 2H22F due to weaker US consumer spending and customer de-stocking pressure. We estimate 2% yoy revenue growth in 2H22F, mainly driven by Milwaukee but offset by Ryobi ’s outdoor tools and floorcare products. Nevertheless, we believe revenue could resume double-digit growth (+13% yoy) in FY23F, driven by the continual rollout of innovative cordless new products for both Milwaukee and Ryobi. We forecast 50bp yoy GPM improvement and expect it to reach 39.3% in FY22F (39.5% in 2H22F), underpinned by MX Fuel cordless equipment, new battery system in M12 and M18 platforms and improved productivity.
Starting to reduce inventory and improve working capital
Inventory turnover days stayed high at 138 days as at end-Jun (136 days at end-FY21). However, management expects to gradually decrease inventory, especially in floorcare products, in 2H22 in order to improve products mix. We believe TTI could turn net cash in FY23F on the back of lower capex and working capital. We cut FY22F-24F EPS forecasts by c.5-8% to reflect weaker demand for DIY tools and floorcare products, but maintain our 20%+ revenue growth estimate for Milwaukee and 50bp GPM expansion in FY23-234F.
Reiterate Add; target price lowered to HK$133.70
We reiterate Add on TTI as we believe it will continue to gain market share in the global power tools market, thanks to continued innovation and product launches , which should help it to expand product categories and geographical coverage. Our TP is lowered slightly to HK$133.70 due to our EPS cuts but still pegged to 22x FY23F P/E, its 5-year average. Share price catalysts include sustained GPM expansion and DIY market recovery. Risks: a sharp slowdown in the US economy and continued component shortages.