Small Caps | Nov 04 2020
This story features MCPHERSON'S LIMITED, and other companies. For more info SHARE ANALYSIS: MCP
McPherson's has expanded into the herbal product segment by acquiring Global Therapeutics and can now build out that business across its pharmacy distribution channel.
-Can expand Fusion sales by leveraging pharmacy distribution network
-A number of acquisitions are being considered in health & wellness market
-FY21 guidance signals strong growth in company-own brands
By Eva Brocklehurst
McPherson's ((MCP)) has gained exposure to a niche part of the complementary medicines market by acquiring Global Therapeutics from Blackmores ((BKL)). Global Therapeutics is a herbal supplements business with the key brands of Fusion and Oriental Botanicals.
Global Therapeutics is expected to deliver an annual revenue rate of $21m and earnings (EBIT) of $4.4m in FY21 and the immediate opportunity for McPherson's should come from distributing the brands across its pharmacy network in Australasia.
Fusion was established in 1999 and provides 74% of Global Therapeutics' revenue via health food stores, while Oriental Botanicals was initially developed for practitioners and since 2012 has been sold in the pharmacy channel.
To fund the $27m acquisition, McPherson's has raised $36.5m from a placement along with an additional $10m from a share purchase plan. The extra funds could provide an opportunity for further acquisitions as opportunities occur.
Moelis, while anticipating a move into wellness, did not expect Global Therapeutics would be the choice yet considers the price reasonable and expects McPherson's to leverage its distribution network, particularly for Fusion.
Ord Minnett also envisages synergies from distribution, with the benefits of operating leverage assessed at least 25% within 18 months. The Global Therapeutics brands broaden the company's exposure to the high-growth segment of herbal products.
The supplements market is commoditised and dominated by Swisse and Blackmores yet herbal products are much more fragmented, the broker notes. McPherson's has secured a 3-year non-compete with Blackmores.
Prior to McPherson's taking ownership, Global Therapeutics was discontinued and up for sale as Blackmores renewed its focus on its core business. Shaw and Partners believes McPherson's will need to reinvest in Global Therapeutics and expand distribution, although agrees there are easy gains to be made in stocking Global Therapeutics product in large domestic pharmacy chains.
Margins are also expected to improve as Shaw expects McPherson's will move Global Therapeutics manufacturing out of the current high-cost Catalent arrangement. The broker now estimates that company-owned brand revenues are likely to be to 90% of group totals by FY22 compared with 70% in FY18.
A reduction in agency business recently has also meant McPherson's has experienced a positive impact on margins across the group.
Shaw observes the company could have completed the acquisition without that capital raising, calculating $60-70m is now available on the balance sheet to undertake further acquisitions. This could add another 20% or more to earnings per share. Indeed, management has signalled a number of acquisitions are being considered in the health and wellness market.
Shaw retains a Buy rating with a $3.09 target, noting offshore opportunities could also be a catalyst, particularly in Asia, where rising incomes and demand for Australian products have resulted in strong growth rates for McPherson's.
Since late 2016 McPherson's has derived revenue largely from beauty products, specifically the re-positioning of the Dr LeWinn's brand. The company is confident it can deliver sales into China worth $48-50m in 2020. The broker expects the export business will materially outperform the domestic operations going forward.
McPherson's is one of the largest suppliers of beauty products in Australia, and the stock is trading at an attractive multiple with respect to the broader market and peers. Delivery on a multi-year business plan could result in a broader re-rating, Shaw notes, and the stock may also have corporate appeal.
Ord Minnett, with a Buy rating and $3.00 target, envisages at least 25% upside for earnings over the short term. The broker was surprised by the mix of debt/equity in the capital raising and agrees surplus funding implies further M&A.
Ord Minnett has adjusted FY21 estimates for pre-tax profit to $25m, at the upper end of guidance. Guidance, for underlying pre-tax profit growth of 5-10% in FY21, is seen reflecting strong growth in company-owned brands, supported by the high-margin distribution of Dr LeWinn's product into China.
Moelis assesses medium-term revenue growth will depend on the company's ability to get Fusion into larger chains like Priceline and Chemist Warehouse. The broker, retaining a Buy rating and $3.39 target, also notes the track record with Dr LeWinn's indicates McPherson's has a strong chance of success with its new ventures.
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.
FNArena is proud about its track record and past achievements: Ten Years On