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Why this top broker just turned Breville Group to a “buy”

A rising tide lifts all ships! The rebound in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is pushing all sectors into the black but the Breville Group Ltd (ASX: BRG) share price is getting an extra boost from a broker upgrade.

Shares in the home appliances maker jumped 2.7% to $19.11 in after lunch trade when the ASX 200 gained a more modest 0.9%.

The increase in the Breville share price is even more impressive when compared with other consumer facing stocks. The Wesfarmers Ltd (ASX: WES) share price climbed 1.8% to $40.40 while the JB Hi-Fi Limited (ASX: JBH) share price fell 0.5% to $34.90 at the time of writing.

Turning bullish on Breville

This is the time to buying Breville, according to UBS which upgraded the stock to “buy” from “neutral”.

The broker pointed to three reasons for its bullish turn on the stock. UBS likes its strong top-line growth outlook with 14% compound annual growth (CAGR) in the company’s Global Product division from FY20 to FY23.

The growth is driven by Breville’s Europe expansion strategy and increased penetration in North America.

Europe is now the group’s second largest market and Breville hasn’t stopped growing on that continent. It will soon have a direct distribution model into France and UBS thinks it will add Portugal and Italy in the second half of 2021.

Trading on a “cheap” premium

The second reason UBS thinks the stock’s a buy is valuation. That may sound funny to some given that Breville is trading on a relatively hefty 28 times price-earnings (P/E) multiple.

But UBS thinks this is more than justified due to the quality of the business and Breville’s growth profile. The broker is forecasting 17% earnings per share CAGR from FY21 to FY24.

Big uplift in valuation from global expansion

The third reason is UBS’ estimation that Breville’s entry into a new region could add up to around $5 a share in value.

“Over the next 3 years, we estimate first year contribution from new countries (direct model) underpins ~14% of revenue growth, with ~86% of growth driven by ramp up of existing markets through retail partnerships and SKU take-up,” said the broker.

“We see further upside if BRG added Asia or Middle-East to direct distribution over the next 3 years.”

Biggest risk to Breville

The key risk is the potential supply chain disruption from COVID-19. Management is playing down the impact of the coronavirus and said its carries substantial inventory.

Nonetheless, no company will be immune should the quarantine restrictions to combat the virus outbreak lasts longer than expected.

UBS lifted its price target on Breville to $22.70 from $17.85 a share.

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Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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