article 3 months old

Brokers Attracted To BWX Acquisition

Small Caps | Jul 04 2017

This story features BWX LIMITED. For more info SHARE ANALYSIS: BWX

BWX has acquired US natural cosmetics outfit Mineral Fusion, providing an opportunity to expand its business globally.

-Opportunity to expand both major brands to other markets
-Product range in line with current customers for Sukin in Australia
-Are consensus margin expectations overly optimistic?

 

By Eva Brocklehurst

Personal care product business BWX ((BWX)) will acquire Mineral Fusion, a natural cosmetics brand in the US, for US$38.4m, with a potential earn-out over the next 12 months of US$4.6m based on meeting gross margin targets.

The acquisition will be funded by debt and accretive to earnings per share in FY18. This business has generated a three-year sales growth rate of 20.4% over 2013-16 and is expected to generate net sales of US$24m in 2017.

Acquiring Mineral Fusion makes strategic sense to brokers, as sales are generated from natural cosmetics and are highly complementary to the company's existing product range. This also presents the opportunity to expand the current BWX product offering in Australia.

Opportunity For Sukin

In turn, the move opens distribution channels in the US for the Sukin brand across a number of retailers. BWX expects to introduce Sukin into the US over the next 12-24 months. Bell Potter does not expect any meaningful contribution on that front until at least FY19 but notes Mineral Fusion has further organic growth opportunities, as less than 10% of the addressable US market has been penetrated.

Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, remains attracted to the offshore sales opportunities that are ahead of the company and retains a Buy rating, raising the target to $6.75 from $6.00.

Canaccord Genuity, also not one of the eight, has a Hold rating and $5.74 target, envisaging BWX is less likely to find a positive catalyst in the short term. The broker agrees the transaction is strategically beneficial and the price paid is reasonable. Mineral Fusion has over 150 stock units and is available in over 3,000 US retail outlets.

The broker is increasingly confident around Sukin sales growth heading into FY18 in China, reflecting encouraging figures for June, at a time when domestic sales growth is facing a more challenging outlook.

Yet, while concerns around China and increased competition have eased, Canaccord Genuity continues to believe consensus margin expectations are overly optimistic, as Europe and North America are generating an increasing percentage of sales and both are more expensive operating environments that will require increased marketing costs. After this acquisition, the broker's estimates for FY18 operating earnings (EBITDA) margins are reduced to 28.5% from 33.4%.

The acquisition price is not cheap, Moelis asserts, although it is a strategic fit. The broker expects double-digit sales growth for Mineral Fusion will continue as further retail partners are added and products are expanded. Moelis upgrades FY18-19 estimates for earnings per share by 7-12% to reflect earnings from Mineral Fusion in FY18 and initial Sukin sales into the US in FY19, calculating the acquisition will be 7% accretive in FY18.

The broker believes the company will continue to grow earnings at strong double-digit rates for the next 3-5 years as its international expansion continues. Moelis, not one of the eight monitored daily on the database, has a Buy rating and $6.85 target.

Mineral Fusion Background

The company was formed in 2009 and developed for the demand for high-quality, natural cosmetics. It currently sells its skin, hair and nail care products, fire a number of grocery retailers such as Sprouts, Natural Grocers and Earth Fare as well as traditional retailers such as Wegmans and Meijer. The company recently signed a supply contract with CVS pharmacies.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

BWX

For more info SHARE ANALYSIS: BWX - BWX LIMITED