I'm afraid I don't subscribe to "blue sky" possibilities, noting - cynically - that they invariably are borne out of hope, as opposed to more tactile precedent.
And HOPE, while pervasive on a forum like HotCopper, is not an investment strategy to which I subscribe.
Back to BKL, I don't like what I see happening to this company, namely a classical return fade as capital becomes mobilised to participate in the excess returns BKL has been generating [ROE > 30%, ROCE > 20%].
In other words, the competitive landscape is intensifying.
The way this is being manifest in a financial sense for BKL is in the increasing requirement to drive sales, i.e., a need to promote and offer rebates.
Specifically, while the Revenue line is indeed still growing at low around 10%pa, alarmingly the P&L item labelled "Promotional Expenses and Other Rebates" is growing at aroudn double that rate.
To wit, Promotional Expenses & Rebates as a percentage of Sales was 14.7% in JH12, up from 9.8% in JH11 which, in turn was up from 8.4% in JH10.
Viewed another way, Promotional Expenses & Rebates have risen steadily over the past several years, to now amounting to almost half of Raw Material cost, compared to just one-fifth 6 or 7 years ago.
So BKL's first mover advantage and dominant market position is being reeled in, whether we shareholders like to acknowledge it or not. This is not counterintuitive given the aggressive marketing by competitors Suisse and Nature's Own.
As for the "blue sky" market place of Asia coming to the rescue, that might prove to be the case at some stage in the future, but at the moment Australia still represents 80% of total group sales, and that’s the bit that’s coming under siege.
If the stock was trading at valuation multiples of 12x P/E and EV/EBITDA of 7x, the risk of ongoing negative operating leverage (i.e., where revenue growth is not matched by bottom line growth) could be argued to be fully priced into the stock.
But at valuation multiples of over 16x P/E and over 10x EV/EBITDA, the stock is being priced for a degree of perfection which I see less and less chance of eventuating.
So after a long and fruitful association with BKL as a happy shareholder, I have in recent weeks liquidated my holding.
Adieu BKL
Cam
BKL Price at posting:
$29.65 Sentiment: None Disclosure: Not Held
