Small Caps | Aug 07 2020
This article, previously published on August 5, erroneously confused the ratings and targets of Citi and Shaw & Partners. The error has now been addressed in this republication and FNArena apologises for misleading readers.
BWX is substantially expanding its manufacturing capacity as growth prospects for the natural skincare manufacturer improve markedly.
-Sukin stockists in the US double with second half revenue up 64%
-New manufacturing facility to substantially increase capacity
-Potential on the balance sheet for bolt-on acquisitions
By Eva Brocklehurst
Personal product manufacturer BWX Ltd ((BWX)) has significantly improved its growth prospects over FY20 and, brokers believe, stands to generate high earnings growth over the next few years.
Margins have increased, turnover of stock has improved and the number of days for receivables is tightening. The number of outlets stocking Sukin products in the US has doubled and the brand continues to gain market share.
Meanwhile, the online sales channel is providing a platform to support growth initiatives and stockists are now those with stronger online models, such as Coles ((COL)), Boots, Target (US) and Sprouts.
A new facility is expected to be up and running at the end of 2021, which should expand manufacturing capacity substantially and increase gross margins by around 3%. The existing facility on the outskirts of Melbourne is also able to keep operating under Victoria's new lockdown measures.
Over the last few years the company has dramatically increased expenditure on marketing and the encouraging signs of a recovery in gross margins can now be observed. Hence, Canaccord Genuity upgrades to Buy from Hold, with a target of $5.58.
The company's FY20 result revealed sales growth of 25% amid improving cash flow. Operating earnings (EBITDA) growth of at least 10% is expected in FY21. Citi, with a Buy rating and $4.20 target, considers guidance conservative, forecasting 11% in FY21, given the continued roll-out of Sukin in the US and the deferral of some distribution gains from the fourth quarter into the first half of FY21.
The quality of the company's performance continues to improve, Shaw and Partners agrees, with investment accomplished alongside growth. Sukin should continue to outperform, with the broker noting second half revenue was up 64%.
Other divisions such as Mineral Fusion, Andalou and Nourished Life are providing scale and earnings but Shaw's bet is on Sukin. Typical Sukin margins are more than 65% and the launch of sanitiser is likely to support incremental sales albeit at lower margins.
BWX has raised $50m in equity to support development of the new operations centre. Despite the risk of shifting production, Canaccord Genuity believes this will prove to be a wise move over the longer term, allowing the business to scale up – effectively tripling capacity – and pursue potential acquisitions. Bell Potter agrees the investment in a new manufacturing facility will "future proof" overall manufacturing capabilities.
Citi ponders whether BWX should build a US factory, assessing growth in the US market may warrant this over the medium term in order to minimise logistics costs, and as US consumers are largely indifferent to an Australian provenance.
The broker calculates the capital raising will take BWX to an $8m net cash position with $72m of surplus liquidity, from a pro forma gearing position of 1.2x net debt/EBITDA in FY20. Hence, there will be funds left for potential acquisitions, although these are likely to be smaller than Andalou and Mineral Fusion.
Shaw speculates whether BWX should sell its international brands, which it believes are dilutive in terms of the Sukin growth trajectory, and considers the environment uncertain. Given a material premium to peers the broker assesses the stock warrants a Hold rating, with a target of $3.93.
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