BWX Offers Alternative Growth Play On China Demand

This story features BWX LIMITED, and other companies. For more info SHARE ANALYSIS: BWX

-Strong growth rates for key brand
-Offshore revenue growing substantially
-$A weakness a challenge
 

By Eva Brocklehurst

Personal care products manufacturer, BWX Ltd ((BWX)), is expanding its natural skin care cosmetics to China. Exports commenced in FY16 and this region is expected to be the main driver of offshore revenue.

The company owns the formulations for all five of its brands, with Sukin the flagship brand, and aims to provide high quality natural skin and hair care at an affordable price.

Moelis believes the stock is another way to play the growing consumer demand for high quality Australian goods in China. The broker initiates coverage with a Buy rating and 12-month target of $4.65, estimating a 28.2% total return comprising a 1.2% dividend yield and a 27% capital return.

The broker believes the strong operating momentum and exposure to China's middle class could drive an upgrade to consensus estimates, which have the stock trading on a FY16 enterprise value/earnings ratio of 18.2, a premium to skin care peers.

In the broker's opinion the stock should command a multiple similar to other stocks which are experiencing high demand in China, such as Blackmores ((BKL)) and Bellamy's ((BAL)). Moelis forecasts a distribution of 4.3c per share in FY16 and 9.5c in FY17. Gross profit margin of 59.9% is forecast in FY16.

The investment thesis is based on the anticipated 65% growth in Sukin's offshore revenue in FY16. The skin care market is expected to growth at a 9.0% per annum rate in China over the next five years.

Moelis assumes BWX will use foreign e-commerce sites for shipment into China. China's contentious animal testing requirements were removed in June 2014, but only for domestically produced cosmetics. Products sold in China such as skin care, deodorant and hair care still require animal testing if they are manufactured outside China. Cosmetics purchased from foreign e-commerce sites for shipment to China avoid this animal testing requirement.

Moelis ascertains that Australians are increasingly willing to refrain from buying products that are unsustainable, unethical and/or include harmful ingredients. The biggest barrier to purchasing natural products is considered to be the price and the broker believes Sukin's price point, at the premium end of the mass market, is a major contributor to its growing popularity.

The company is generating cash, which should support future acquisitions and new products. The Australian market is fragmented, with a number of brands needing research, production, warehouse and logistics capabilities as well as working capital. Moelis estimates BWX could comfortably take on $35m in debt for acquisitions.

The market for beauty products is highly competitive and there are large multinationals that have greater resources to respond to changing conditions. Moelis acknowledges this as a risk, as well as any move by the Chinese government to protect the local industry, which could be detrimental to BWX.

Another risk is that the continued depreciation of the Australian dollar will make inputs sourced offshore relatively more expensive. The broker believes it would be challenging for the company to raise its prices in this scenario, as it aims to maintain a “masstige” price point and increase market share through volumes.

Sukin was launched in 2007 and acquired by BWX last year. Moelis estimates that 90% of the product is sold in pharmacy stores. Sukin products, according to the company's prospectus, grew 40% over the year to August 2015, higher than the 29% growth rate attributed to natural skin care products in Australian pharmacies. Moelis forecasts 38.8% growth in domestic sales for Sukin in FY16.

BWX also owns four other brands, which fill the company's desire to have a portfolio across a number of sales channels and demographics. Derma Sukin is formulated for those with sensitive skin, The Uspa range consists of products for use in professional salons and the day spa market.

Renew Skincare is a brand of organic products which use rose hip oil and is sold in the Australian market via a network of distributors. Edward Beale hair care products a sold through speciality retail outlets.

The company also manufactures for third parties, which constitutes 21.8% of the broker's FY16 revenue expectations. BWX is reducing its third party manufacturing revenue in FY16 by 15% as it migrates some customers.

While intent on marketing its own brands, the company will continue to provide services to Brut, Skin Doctors, MOR and Mr Smith. This third party demand is driven by customers inability to self-fund their own faculties and the need for integrity, traceability and safety of ingredients.

The largest export markets for Sukin in FY15 were New Zealand, the US, Canada, Singapore and the UK. The company’s manufacturing capability is located in Victoria.

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