McPherson’s Gaining Strength In Diversity

This story features MCPHERSON'S LIMITED. For more info SHARE ANALYSIS: MCP

-Streamlining existing grocery channel
-Two more significant acquisitions
 

By Eva Brocklehurst

McPherson's ((MCP)) is a small cap distributor of a range of products in housewares, personal care and household consumables with operations in Australia, New Zealand and Asia. Stockbroker Moelis believes the stock has undemanding fundamentals, even given this month's share price rally of more than 12%.

The broker acknowledges FY13 was disappointing given a decline in profits. Underlying profit dropped 22% in FY13, despite a 1% increase in underlying revenue. At the recent AGM, the company confirmed it was on target to improve profitability and outlined several initiatives that have taken place. Moelis expects that both the strategic initiatives and recent acquisitions will provide the necessary earnings growth and deliver benefits in the next year or so.

A major positive for the broker is that the recent acquisitions diversify the company's exposure to other channels for distribution as well as within the grocery channel. In March the company acquired 82% of Home Appliances P/L and this provided the initial entry into the kitchen appliance category. The brands in that business supply cooking equipment at the lower end price segment. Very recently the company has also bought Think Appliances to tuck into the home appliances division. Think has annual net sales of $30m  in the Australian market and owns the Baumatic, Venini and Damani brands. The acquisition of Think will give the company further channel diversification through entry into the plumbing segment.

The other recent purchase was Dr LeWinn's and Revitanail brands in the personal care segment. These are expected to deliver $50m in revenue and over $7m in earnings for FY15 to be 10% earnings accretive in FY15. All these acquisitions leverage existing infrastructure and provide channel diversification, according to the company. In home appliances it's the kitchen installation and commercial building channels. In the case of personal care it's the pharmacy channel.

Moelis also hails the progress made in regard to initiatives introduced in response to the pressure from the grocery channel. This included removing underperforming products and brands, contributing to a reduction in overheads, preserving margins and increasing warehouse capacity.

The broker upgraded the rating to Buy in early November and has a target price of $1.75. Even with the 12% increase in the share price Moelis regards the FY14 price/earnings ratio of eight times and a dividend yield of over 9% as worthy, because of the strength of the company's brands and the benefits that have ensued from restructuring.
 

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