Brokers Cautious On BWX

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Personal care product manufacturer/distributor BWX will acquire its second US brand as it seeks to expand its presence in the US natural skin care market.

-Focus now on integrating key acquisitions, Mineral Fusion and Andalou Naturals
-Company expects to comfortably exceed FY17 growth in operating earnings
-Large growth opportunity envisaged with expansion into Coles
 

By Eva Brocklehurst

BWX ((BWX)) will acquire Andalou Naturals, based in California, for US$80m plus earn-outs. This is considered the number one facial skin care brand in the US natural channel. The acquisition is strategic in that it diversifies the company's earnings base, while also adding another high-growth brand after acquiring Mineral Fusion several months ago.

The company has stated its acquisition phase is now complete and the focus will be on integrating and consolidating the acquisitions. On this matter, Bell Potter acknowledges some surprise at the pace of acquisitions, after three deals in four months, while the aggressive move into the US has come sooner than expected.

Given the acquisition metrics, modest synergies and growth profiles of Mineral Fusion and Andalou Naturals, the broker believes BWX must successfully drive organic growth and also material sales for Sukin through distribution channels in the US in order to generate sufficient returns.

BWX has reconfirmed guidance and expects to comfortably exceed the 30.7% growth in operating earnings achieved in FY17. Guidance does not include the acquisition of both Nourished Life and Andalou Naturals but does include expansion into Coles ((WES)) supermarkets.

Coles

Canaccord Genuity takes this opportunity to review its domestic sales forecasts, given the scale of the opportunity at Coles. Domestic revenue forecasts are raised by 5% for FY18 and 10% for FY19 for the company's Australian brand, Sukin.

Canaccord Genuity estimates Coles accounts for around 10% of beauty and personal care sales in Australia and the number of the company's units available at Coles has now increased to 39 from an initial 13. Discounting at Coles has also eased, the broker observes, which has taken some pressure of the company's other sales channels in Australia.

Offsetting the large growth opportunity via Coles are some recent soft indicators in the broker's monthly data that is used to forecast e-commerce sales in China.

Andalou Naturals

The maximum cost of the acquisition is US$91.2m. The US$80m purchase price is made up of US$64m in cash and US$16m in scrip. The transaction is being funded by a 1-for-5.7 entitlement offer at a price of $5.92 to raise $100m, of which $82m will be used for the cash consideration and the remainder for costs and debt repayment. Brokers assume that the full US$11.2m in earn-outs will be achieved and paid in cash across the five-year performance period.

The largest sales channel offering Andalou includes chains such as Wholefoods, Earth Fare and Sprouts. The brand is well represented across key distribution channels, Bell Potter notes, which also suit the distribution of Sukin in the US. Andalou currently has 129 units across its range and while complimentary to the Mineral Fusion and Sukin brands retails at a higher price point, targeting premium segment of the market.

The implied price on an FY18 pro forma basis is 9.4 times enterprise value/operating earnings (EBITDA). BWX expects synergies of US$1m, primarily from shifting production to the manufacturing facility in Victoria.

Andalou generates an earnings margin of 23.2%, including synergies, versus 36% for BWX in FY17. Canaccord Genuity believes the bulk of the differential between Andalou and Sukin is around sales and marketing expenses, while gross margins are actually reasonably similar.

Andalou is expected to achieve 22% revenue growth rates from FY15-18 and, with only 12% of FY17 sales coming from drug, pharmacy, mass and grocery channels, the broker suggests there is a relatively clear growth path.

Canaccord Genuity estimates the transaction to be 12% accretive to earnings on FY19 forecasts and maintains a Hold rating, as it continues to envisage risks around domestic growth margins and cash flow. Target rises to $6.40 from $5.47.

The acquisition of Andalou Naturals means Bell Potter's earnings per share forecasts for BWX rise 7.6% and 5.1% for FY18 and FY19 respectively. Longer term, the broker is attracted to the growth story but in the near term considers the share price has appreciated to a level which does not meet its return requirements. Rating is downgraded to Hold from Buy and the target raised to $7.10 from $6.80.

The broker's underlying forecasts for the business remains unchanged. While positive on the long-term growth story and growth in international sales, as well as tailwinds from a shift towards natural products, Bell Potter suggests the share price reflects that outlook and the business is fair value.

Also, Moelis has added 6-17% to forecasts to incorporate this latest acquisition as well as strong sales into Coles. Moelis' price target moves to $7.83 while the Buy rating has been retained.
 

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