Advantages
Marketing strategy: The key differentiator of BWX to other branded PC products is its marketing spend. While maintaining similar or lower gross margins, the reason for industry leading EBITDA margins is due to its spend on sales and marketing of 10% of sales comparing favourably to international competitors at 25 – 30%. This competitive advantage is derived from the word of mouth endorsement of Sukin by women who love the product, which has and always will be the best form of marketing out there. BWX choose to utilise digital media and influencers to promote their brand rather than traditional media, a far more effective return on investment due to the increased likelihood of a young woman trying out a new product recommended by a blogger they follow. Bloggers are more likely to be perceived as a trusted source compared to just another billboard or commercial. Beauty bloggers are all powerful in this space as lead influencers, and if you want proof ask any young woman what beauty blogs they read and you will soon unearth a whole new side of the internet. Blogs upon blogs with high traffic, devoted to discussing Napoleon Perdis vs. MAC (pretend like you know) as a much more worthy match-up than Mayweather vs. McGregor. Another valuable bit of market research is to google “Sukin blog review” and read some of the bloggers reviews of the products, or give their Instagram page a visit to see the engagement they nurture with their core demographic. A far more valuable feedback tool for consumer investing than sell-side research.
Blue = "Sukin"; Red = "Mineral Fusion"
Interesting trend in search queries – 100% growth of interest for both Sukin and Mineral Fusion over the past 3 years
Capital light growth: Even though it is vertically integrated, BWX should be able to support further growth as it has in the past with minimal capex (1 - 2% of sales) Management: The management team and board have extensive FMCG experience and have been around the company for a long time overseeing substantial growth thus far. Moving forward this group who have to date made all the right moves are incentivised to keep growing the brand since key senior personnel have the majority of their net worth derived from paper fortunes in BWX stock (CEO John Humble holds 10% of shares outstanding) Risks
Customer concentration: A concerning characteristic of the Australian pharmaceutical market is the relative concentration of a few key players such as Priceline, Terry White, and Chemist Warehouse. BWX derived 50% of its FY16 sales from three customers and it is plausible that these customers may attempt to exercise market power to squeeze BWX margins or demand volume based promotional discounting as Sukin grows. This however seems unlikely while the Sukin brand remains attractive and customer loyalty is high Competition: Currently competing with MNC and other nature focused company sub brands such as Nivea, Olay, Jurlique, Trilogy, Natio, Burts Bees. The revolution of natural products has not gone unnoticed as FMCG majors will increasingly seek to enter and dominate the sector, not ceding share to smaller names. As such, it is likely competition will increase in the “masstige” segment of the market. A natural mitigating factor to this is the personal importance of skin care to most women and the high customer retention rates once a product is established as a part of a skincare regime Execution: The downside for BWX is that overseas consumers tastes deviate from Australian consumers and overseas growth does not pan out. Under such a scenario, domestic sales are likely to hit a ceiling over the medium term and the multiple is likely to de-rate as it could go ex-growth Brand deterioration: While highly unlikely, a scandal attached to the Sukin brand that adversely affects its natural image or results in a recall would be a disaster for the company. Bloggers may also take a negative view of the brand as Sukin is currently not “organic certified” which some posts online have already noted Poor execution: This risk is particularly relevant within the Chinese market. It is uncertain what proportion of domestic sales are derived from informal “diagou” sales channels, however estimates have put it at 10 – 15%. The risk of entering China too quickly via e-commerce channels may be that diagou margins are compressed and the diagou promote other Australian skin care brands over Sukin to their Chinese clientele. Another risk to the Chinese market is regulatory changes that are currently delayed indefinitely by the government are introduced whereby Sukin will be effectively locked out of direct sales into China due to requirements for products to be animal tested Brand building expenses: New markets take increased discounting to grow distribution and higher brand building costs, compressing margins Valuation
In terms of valuation, on first glance at the share price chart it feels as though we have missed the boat on BWX due to the stunning run up in price since the $1.50 (!!!) issuance in November 2015. This is due to the company soundly beating its prospectus forecast through outperformance of Sukin. Share price has continued to appreciate due to a raft of earnings upgrades and improving analyst commentary, but as we consider the investment today is there significant upside to the lofty ambitions the market has given the company credit for already?
Based on management guidance and consensus estimates (Annual results are due in a few weeks) on a trailing basis for FY17, BWX trades at c. 22x EV/EBITDA (assuming $50m of acquisition debt related to MF) and at 31x P/E. While the pricing on face value seems stretched and beyond the grasp of a traditional value investor, this fails to recognise the obvious growth potential and momentum of the business. On a forward basis utilising FY18 consensus, BWX trades at c. 15x EV/NTM EBITDA and 23x P/E NTM. The upside from these levels is significant as the growth levers attached to geographic expansion, exposure to underlying consumer trend shift to natural products, operating leverage and cross selling between Mineral Fusion and Sukin means earnings can continue to grow substantially off a relatively low basis for many years to come.
Traditionally, due to the mature nature and similar capital structure of many FMCG businesses most stocks within the sector trade on a P/E basis, with multiple premium reliant upon profitability and growth trajectory. Looking at the valuations of a PC peerset (JNJ; PG; OR; ULVR; CL; EL; BEI) shows trading levels of 20 – 28x forward P/E for lower growth than BWX (albeit all these conglomerates hold a much higher quality stable of diversified brands). Increasingly stretched valuations over the past few years in a post-QE world may be inflating this but considering comparables we can expect BWX to trade at an EPS multiple in the future of 20x given the higher growth profile. From a cash flow perspective, the FCF yield on the business may seem weak over the near term however; cash conversion from EBITDA to FCF is not reduced due to capex but rather NWC investment to support growth. Upside from buying at these levels is clear when you consider the very real possibility of EPS growing threefold from current levels.
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Blue = "Sukin"; Red = "Mineral Fusion"
