Investing

Recent Buy: BWX Ltd (BWX:AU)

BWX Ltd – Sukin

Perhaps it’s with a little irony that after starting a blog on personal finance and value investing in 2015, it’s taken me almost two years to make a direct equity purchase.

It’s not my first ever equity investment, but the first in a long time.

BWX Ltd (BWX:AU) is the owner of Sukin, a small Australian skin care company focused on the ‘natural’ beauty and personal care segment selling primarily through boutique distributors and pharmacy outlets nationwide. They listed on the ASX in late 2015. BWX Ltd also owns other personal care brands, including Upsa, Derma Skin, Renew and Edward Beale and provides some third party manufacturing, which actually makes up a decent chunk of their revenue (25%). The Sukin range however contributes the vast majority of revenues at circa 70%. Sukin products are vegan, naturally made and environmentally sustainable, a popular and growing segment of the personal care products market.

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Competitors are well known, including Unilever, P&G and L’Óreal Groupe. BWX Ltd’s CEO is John Humble, who has been with the company since 1993 and pleasingly, has plenty of skin in the game (if you’ll forgive the pun) holding approx 11% of the company shares since listing.

All $ are AUD unless otherwise noted.

Company Financials

Revenues in FY2014 were $38.7mln, in FY2015 $45.1 mln and grew to $50.1 mln in FY2016. In the first half of FY2017 they came in at $37.5mln (up 36% PCP) – almost their FY2014 result but in just 6 months. Gross margins have grown from ~55% to ~65%.

NPAT has grown from $2.8mln in FY2014 to $12.2mln in FY2016.

The company currently has a low dividend yield relative to the ASX300 and a current payout ratio of 35%. Just as well, since there seems plenty of reason to re-invest earnings into the company.

BWX Ltd has very modest debt, which is good to see.

Where’s the value?

I believe the true value in this business is its future growth potential. Domestically, Sukin’s revenues grew 49% PCP in 1HFY17. Currently only $6.7mln in revenue comes from the international market, however this grew 115% PCP in 1HFY17. Strong international growth is expected to be driven by new product sales in the UK’s major pharmacy chain, Boots, with 80 high turnover stores stocking 27 Sukin products from Q2 FY17. The Sukin range will also be available to order from any of the 2500 Boots storefronts and the online Boots store. (Apparently Boots have over 15mln registered customers, 90% of whom are women). Sukin also sells through Holland & Barret and exports to Singapore, HK, Malaysia and will be expanding in Canada over the next 6 months and has an eye on broader China, particularly their e-commerce market.

Sukin markets itself as between the top tier of the mass market and the lower end of the prestige skin care market (i.e. ‘masstige’ market) with an average unit price of $11AUD (i.e. it’s relatively inexpensive). Globally, this is a very big market (skin care accounted for $111bln in USD revenue world wide in 2014).  If BWX Ltd can snare just a fractional amount of this revenue in the next 5-10 years, earnings will grow substantially. The current share price has some growth factored in, but I don’t think it has anywhere near 5 years worth of growth accounted for and expect the underlying business to be worth substantially more in 3 or so years than its current market cap of $490mln.

Key Risks

There are enough risks to consider, including product reception in overseas markets, the dangers of over-extending into unprofitable segments of the beauty and personal care market or where they simply cannot compete with incumbents, legislative and distribution issues (esp. perhaps in China). A further risk, although some shareholders may welcome it is takeover. I think a takeover offer would likely cut short the potential trajectory of BWX Ltd and cap any profit from holding the equity to a much more modest amount.

That said, I like the business a lot and believed it to be undervalued considering its future prospects. I bought 425 shares earlier this month at $4.82 each.

Disclosure: Long BWX. Do your own research and seek personal and professional financial advice before making any financial decision. 

4 thoughts on “Recent Buy: BWX Ltd (BWX:AU)

  1. It’s always interesting to read about another company that I’ve never heard of but have used their products! Will definitely keep a look out for them. Just wondering if you do any number crunching to determine whether the company’s share price is low or high?

    1. Hi Len, thanks for dropping by. I try to estimate intrinsic value before purchasing a stock – both current value and future value for 3-5 years out. Parenthetically, I couldn’t even begin to imagine 10 years out for a company like BWX, but would try to imagine it for more stable companies.

      My approach for BWX was three pages of notes and calculations in a spreadsheet based on the Morningstar database, their IPO prospectus and subsequent investor notifications, plus some googling regarding the global market. Given that global market, BWX current (tiny) market share in Australia and a conservative view on its international expansion prospects, I made a very rough estimate of potential future revenues and from that estimated potential future profits. One can then estimate intrinsic value however prefered (e.g. discounting future cashflows, I’m no expert). The issues are with the estimations/asusmptions. I could be wrong, miscalculate or could be right but the company changes direction or runs into difficulties.

      If the company never earns a dollar more I would say it is overvalued (e.g. if I were to look at normalised NPAT over the past 3 years without future growth). But based on my assumptions about growth and the probability of that growth occuring, I believe it was undervalued compared to a reasonable estimate of future value. The range of values varies depending on the scenario, quite considerably (I did 3-4 possible scenarios).

      As an aside, I’ve also used Sukin products on and off for years, and re-discovered them during a trip overseas. My sense is that Australia is a little behind the curve in consumer trends, and what we see happening here tends to be already established overseas.

      Thanks for the comment!

  2. Nice buy WF30! Funnily enough we were also looking at BWX but it then jumped up..perhaps we will be presented with a nicer price at some point.

    I think it’s going to do great over the next few years and there will be a big growth in natural products here and the other countries BWX is currently operating in.

    Looking forward to seeing how this one goes for you 🙂

    1. Thanks Mr DDU – I suspect it will be a rather bumpy return, and honestly the share price could go anywhere in the short term, especially with the all the potential global disruptions unrelated to BWX but likely to spook a market. Which reminds me of words Munger apparently said to Buffett re some opportunity that looked good but was unattractively valued, “if you wait, I think you’ll get your price”.

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