@hankreardon
Sure, the “one-chart-catch-all” approach, as convenient as it may be to capture the big picture, also inevitably hides a fair amount of nuance.
Beside Gross Profit growth, the detail that caught my eye more than anything else was the marked improvement in [Trade Terms, Promotional Rebates and Discounts], as a percentage of [Gross Revenue]. The ratio went down sequentially by as much as 390bps, from 35.2% in 1H20 to 31.3% in 2H20; that is the most significant improvement in the post-Symex era, and is in my opinion more important than Gross Revenue growth per se.
To be honest, if we look at top line growth between December 2012 and June 2018, there was virtually none; the Duracell/Procell distribution agreements did boost Gross and Net Revenue by +56% and +47% respectively, between June 2018 and December 2019, but did little to improve Gross Profit up to that point, due to their low-margin nature. Having said that, like-for-like Net Sales growth in Duracell-branded products for FY20 was in line with Group Net Sales growth, so it may well be that part of the improvement in overall Gross Profit was derived from those distribution agreements.
Going back to the previous point, I see the improvement in [Trade Terms, Promotional Rebates and Discounts]/[Gross Revenue] as being particularly important at this juncture because a) the balance of trade power with supermarket/retailer chains is, in general, one of the biggest elements of risk for this type of business, and b) the improvement shows that, in a period of disruption, Pental has seen its negotiating/competitive position strengthened as opposed to deteriorated.
Then, with specific reference to cash flow, it is true that the winding down of the Capex cycle is resulting in enhanced FCF generation, hence in improved quality of earnings, just at the right time; this is also likely to last in the short/medium term, although I suspect more investment into capacity will be needed if the increase in demand is sustained. The speed and efficiency in introducing new products (hand sanitisers, etc.) to the existing distribution channels, with minimum additional capital investment, does bode well for earnings/FCF momentum.
Overall, I do agree that things seem to be improving on multiple fronts, and that the opportunity for Management to deliver appears to be significant. As M&A has been mentioned, one thing I personally hope is that they won’t do anything silly on the acquisition side. With that said, and as you have also pointed out, Pental’s balance sheet is in pristine shape and financing conditions are as accommodative as it gets; so, if the right opportunity comes along, EPS accretion should be easily achievable without jeopardising financial solidity.
Cheers
