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.
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.
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.
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.