Vitaco Energised For Healthy Chinese Demand

This story features VITURA HEALTH LIMITED, and other companies. For more info SHARE ANALYSIS: VIT

-Strong industry fundamentals
-Well placed to exploit Chinese demand
-In-house manufacturing a plus
 

By Eva Brocklehurst

The nutritional supplement industry in Australasia is strong… and healthy. Local producers of vitamins and supplements are further supported by Asian consumers, who consider such products manufactured in Australasia are "clean and green". Three brokers recently initiated coverage on vitamin, sports nutrition and supplement manufacturer, Vitaco Holdings ((VIT)) citing the opportunity in China, in particular.

The company manufactures most of its product in Auckland, New Zealand, and exports a range of products to over 30 countries. Its well-known brands include such names as Nutra-Life, Wagner, Healtheries, Musashi, Balance, Aussie Bodies and Abundant Earth. These products are in categories that are primed for substantial growth, Morgans maintains. On a per capita basis Australasia is among the largest consumers of these products globally. Vitaco Holdings listed on ASX last month.

Morgans initiates coverage with an Add rating and $3.25 target, noting the company is benefiting not only from growing sports participation and gym attendances but also from Chinese demand for locally manufactured products.The opening up of China's trade, e-commerce and a falling Australian dollar are also factors in Vitaco's expansion.

Morgans expects double-digit growth for many years to come. FY17 should also include removal of duplicated costs following the Musashi acquisition. This year the catalysts include profit upgrades, expansion and further accretive acquisitions.

Morgans believes the main risks are rising input costs, adverse FX, and competition. The stock is also considered an attractive takeover target, especially to international groups seeking an entry point in Australasia or, alternatively, domestic pharma/nutrition companies wanting a more dominant footprint along with the ability to leverage strong Asian demand. There are barriers to entry for offshore suppliers to the Australasian market, with high levels of regulation and certification required.

Vitamins and supplements make up 44% of Vitaco's revenue with sports nutrition a further 38%. The products are exported through a broad range of channels. By sales revenue, Healtheries is the number one brand in the vitamins category in New Zealand and Aussie Bodies the number one brand in sports nutrition in Australia.

Citi also believes the company is well placed to exploit growing Chinese demand and forecasts FY16 earnings of $22.5m, 12% ahead of prospectus forecasts. The company generated $14m in product demand in Asia (mostly China) in FY15, the broker observes, and this is expect to rise to $52m by FY18. The company is the only listed NZ-based manufacturer and is lifting its marketing intensity towards Chinese consumers.

Citi considers the trading multiples are fair, with a price/earnings ratio of 27 on the back of forecast compound earnings growth rates at around 29% out to FY18. Upside should be driven by better sales growth in China, which has boosted the multiples for relevant comparable companies, the broker observes. Citi has initiated coverage with a Neutral rating and $2.85 target.

Of most interest to the broker is the fact the company does most of its own manufacturing and sports categories have significant sales and margin growth. The Chinese market represents 23% of Citi's valuation. Sales of products for consumption in China, which is 8.0% of total revenue, are handled by Chinese traders which purchase the product in Australia, largely via e-commerce platforms.

The broker also expects the brand profile to improve through marketing expenditure. The company is at a disadvantage to large competitors such as Blackmores ((BKL)) and Swisse in terms of its size but its security of supply is a potential advantage, in the Citi's opinion, because of in-house production and a unique NZ heritage. Still, the lack of marketing scale needs to be addressed in order to build the brand profile, the broker asserts.

Risks include customs and registration in China. There are proposed changes in the wings, but the restrictions still appear to Citi to be tight regarding imports of vitamins. If they become easier, however, there may be more global competition for vitamin sales in China.

JP Morgan takes up coverage with an Overweight rating and $3.00 target, noting that over the last five years the vitamin and supplements category in Australia has grown at a 9.6% compound annual rate with sports nutrition growing at a 14% rate. An ageing population and growing awareness of the importance of preventative health measures are a trend which the broker believes will underpin further growth for Vitaco.

Vitaco's vertically integrated business model is a key feature of the company, the broker contends. It controls a large portion of its manufacturing base and this is a key strategic advantage given the majority of its competitors rely on third-party contract manufacturers. The benefits of this in-house production include lower cost of goods sold, quality control and the speed to market.

A total of two Buy ratings and one Hold feature for Vitaco on FNArena's database. The consensus target is $3.03, signalling 10.3% upside to the last share price.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms