This profitable dividend payer is cheap as chips (and no one is talking about it)

The share price of Beacon Lighting, along with other retailing stocks, has been sold off quite heavily over the past 12 months on fears of a slowdown in consumer spending. 

Whilst those fears have been correct to a degree, it is becoming apparent that it might not be as bad as originally thought. The most extreme share price moves tend to happen when a company announces something that was unexpected by the market.

Beacon has reported record sales of $312 million for the financial year 2023, although perhaps not unexpectedly, its cost base has increased on the back of inflationary pressures along with higher interest rates, which has resulted in lower earnings than last year.

Why Beacon Lighting (ASX: BLX)?

We have owned Beacon Lighting since the inception of our fund in early 2021. The share price of many retailing stocks, Beacon included, can be quite volatile given their earnings are exposed to consumer spending which can move up or down depending on external macroeconomic factors. 

Zooming out, however, Beacon has a fantastic track record of growing its business through the cycle. More importantly, this growth has come without having to add huge amounts of extra capital to the business.

What you need to know off the back of BLX’s result

Outlook: The outlook is often more important than the actual result for retailers and whilst Beacon has said that comparative sales for FY24 are below last year, this is not surprising given strong post-COVID spending from FY23.

Inventory: Inventory levels are also a key item to watch with a company like Beacon, with the FY23 result showing a slight increase from last year. Whilst ordinarily, we would have expected inventory to fall a little, the company is growing in the trade segment of its market which requires inventory availability to be successful.

Gross Margin: One of the key attractions to BLX for us is its high gross margin, which in this result was 67.7%. We have always believed that having a high gross margin is a sign that a company has a competitive advantage. Beacon achieves this as it is a vertically integrated retailer which can successfully manage the supply chain from the factory to the customer.

Four pillars of growth for FY24 and beyond

Beacon Lighting is cycling a strong FY23, along with a slowdown in consumer spending on the back of higher interest rates. Despite this, however, the company has four pillars for growth that will help drive the earnings of its business for FY24 and beyond.

1. Store Count: Store count was flat in FY23 as the group consolidated some sites which offset new openings. This, however, sets them up for higher levels of growth in FY24 with the group guiding to eight new store openings. 

2. Trade: Trade has become a much larger feature in recent BLX results as the group grows into this large segment of the market. Pleasingly, trade sales grew 21.6% during the year and the group now has over 50,000 trade members. The growth in trade may also help its business to be less cyclical going forward.

3. eCommerce: Online sales are now 10% of BLX’s store sales. The group has 16 dedicated business websites and the inventory available online continues to increase.

4. New Business: Beacon has had a history of incubating new businesses to drive future growth. Global expansion has been a key focus in the FY23 result and BLX is showing signs of success across the USA, Europe and Asia. Another area of new business has been the ownership of the underlying property from which BLX operates and the group now has an interest in seven sites which increases the overall strength of the business.

We are happy owners of BLX on the back of this result

Beacon listed on the ASX in 2014. At that time, the company made almost $12 million in net profit after tax on a contributed capital base of $62.5 million. Fast forward to 2023, and the company has almost tripled its net profit to $33.6 million, however, the contributed capital has only grown approximately 20%. This tells us we have a sustainable business that can grow profitably over time and increase its earnings on a per-share basis.

Further to its growth in earnings, the business has also paid over $100 million worth of dividends to investors since 2015, as well as invested almost $20 million into its property holdings. 

The business continues to grow and strengthen despite some uncertainty around consumer spending, so we are therefore happy to own the company through the cycle.

Key company data for Beacon Lighting 

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