The Beacon Lighting Group Ltd (ASX: BLX) share price is up 25% in less than one month. Can it keep soaring higher?
Beacon Lighting is a specialist lighting retailer that operates throughout Australia. With an ambitious expansion plan, the company accessed capital by listing its shares on the ASX in 2014. Since listing Beacon has aggressively pursued its store roll-out, growing from 83 stores to 112 as at the end of 2018. Management plans to open 6 new stores each year.
The Beacon share price was driven higher as a result of growing profits as stores rolled out. The last 12 months, however, had seen a pullback in the share price amidst a slowing housing sector leading to weak demand for its products.
Why Beacon Is Now Lighting Up Portfolios
Beacon’s share price has gained 25% since May 7 without any significant news being released to the market. I suspect that the market’s growing expectations of multiple rate cuts from the RBA has been a significant driver. Beacon Lighting is exposed to the Australian housing sector, so it will benefit from lower interest rates.
Some investors may have also seen the preceding weakness in the share price as an opportunity to pick up some shares in a well-managed business at a cheap price.
Is The Rally Sustainable?
Lower interest rates may provide a short term boost to the Beacon share price. Of greater importance, however, is the fall in housing approvals which are down more than 24% in the past 12 months, according to construction data released by the Australian Bureau of Statistics this week.
Due to the time lag between gaining approval for a new home and the actual build being undertaken, I think we can expect to witness a commensurate fall in residential construction activity over the coming 12-24 months. This will have a big impact on Beacon since it benefits greatly from new housing starts.
For the first time since listing Beacon’s like-for-like sales growth, which excludes newly opened stores during the reporting period, was negative in the December half-year results. This is concerning as I believe sales will come under even more pressure as residential construction slows.
The Verdict
Trading on a trailing price-earnings ratio (P/E) ratio of 14x and a 4% dividend yield Beacon is by no means expensive based on conventional valuation metrics. However, with a slowdown in residential construction set to worsen, I think earnings growth will be severely tested. As a result, I will be watching from the sidelines and looking for signs of a turnaround in the housing market before opening a position.
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At the time of publishing, Luke has no financial interest in any company mentioned.
