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McPherson’s Looking Better In FY18

Small Caps | Dec 18 2017

Moelis welcomes the divestment of the McPherson's home appliances division, expecting the company to now concentrate on growing its health & beauty business.

-Updated guidance offset some of the impact from the divestments
-Another brand acquisition that strategically fits with health & beauty is likely


By Eva Brocklehurst

McPherson's Ltd ((MCP)) expects stronger trading conditions will prevail in FY18 as the non-core home appliances business is being divested to Glenn Dimplex for $28m. Updated guidance offsets some of the impact from the divestment, Moelis notes.

First half underlying pre-tax profit is expected to be at the "better end" of the guidance range provided at the AGM. This indicated FY18 pre-tax profit would be down -10-15%.

While the pre-tax contribution from the home appliances business is expected to be around $2m in FY18, in light of the expected in improvement to trading conditions in the first half, the broker's estimate for underlying pre-tax profit declines by just -$1.1m. Moelis forecasts core net profit of $12.3m for FY18 and $13.6m for FY19.

Based on forecasts for FY18 operating earnings (EBIT) of $4m for this division, the sale price suggests to Moelis a transaction multiple of 7x enterprise value/operating earnings. The sale will incur a non-recurring loss on divestment of between -$2-3m in the first half of 2018. Funds will be used to pay back an outstanding $25m after cash is received.

Moelis believes the stronger growth and profitability in the remaining health & beauty business warrants a higher valuation for the stock. Moreover, the divestment of a non-core business at a good price highlights management's ability to execute a sale and releases $28m that can be invested in the higher margin business.

The balance sheet is strong and the broker expects management to acquire another brand that fits strategically with the health & beauty business. However, this is not expected to be an opportunity that presents immediately.

Moelis downgrades forecasts for earnings per share by -1-6% in FY18-20 to reflect reduced earnings from the divestment of home appliances, partly offset by stronger trading conditions. However, with a significantly reduced debt load and a higher quality earnings stream from health & beauty, the broker believes the business deserves to trade at a higher multiple.

Moelis raises the target to $1.50 from $1.29 and retains a Buy rating. The broker forecasts a distribution of 7.3c in 2018 and 9.2c in 2019.

Among the McPherson's health & beauty brands are A'kin, Dr LeWinn's, Manicare, Swisspers, Eylure, Elegant Touch, maseur, Lady Jayne, Trilogy, Goodness and Moosehead.

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