Treasure Chest: Attractive Entry Point For Blackmores

This story features BLACKMORES LIMITED, and other companies. For more info SHARE ANALYSIS: BKL

– Regulation selling overdone
– Bricks & mortar opportunity substantial
– Solid earnings growth ahead

By Greg Peel

In February 2015 the shares of vitamin and dietary supplement supplier Blackmores ((BKL)) were trading at $40. In February 2015 they hit $220. Then the wheels fell off. Currently they are trading around $140.

Blackmores’ 2015 surge was all about China discovering vitamins and supplements in plastic bottles for seemingly the first time. It was another step in the Westernisation and rising middle class in a country that for eons has put faith in herbs and powdered animal parts. Infant formula was also discovered, hence the equivalent rise in the shares of A&NZ powdered dairy product suppliers.

The wheels fell off in early 2016 for two reasons. The primary reason was a clamp-down on import regulations from the Chinese government. This was reason enough for investors to fear an end to the rivers of gold. But because Blackmores shares had run so far, so fast as the herd climbed over itself, clearly any sliver of bad news was set to spark a big share price overreaction.

China’s import rules are murky at best. Last April the government introduced rules restricting import volumes via the cross-border e-commerce channel. Blackmores sells its products to China mostly on-line. Clearly there was reason for investors to be concerned.

But most of those sales are not via the e-commerce channel. Credit Suisse notes 70% of sales are via the “daigou” channel in which Australian selling agents use Chinese personal post. This channel has been less affected by new regulations. Peer A2 Milk ((A2M)), also operating in the daigou channel, suggested last month the impact from regulatory changes has not been as bad as feared.

Credit Suisse thus believes the impact on Blackmores’ business is not a great as the share price fall implies. But more importantly, the broker sees another Chinese regulation development that should prove very positive for Blackmores, via the good old bricks & mortar channel.

The Chinese Food & Drug Administration is supplementing its existing lengthy and costly registration process with a faster and simpler procedure for 22 common vitamins and minerals. This should allow Blackmores to expand its product range in Chinese stores materially, Credit Suisse suggests, perhaps threefold.

The analysts took a trip to China to see for themselves. There they found wide brand awareness and perceptions of quality. Blackmores is adding resources to exploit the Chinese market faster than its peers and has established a local subsidiary and distribution relationships.

In short, Credit Suisse believes Blackmores’ China sales could double by FY20, driving a compound annual growth rate in earnings of 16% over the period. By then, China sales could account for half of group sales.

The broker has initiated coverage of the stock with an Outperform rating and $175 target.

This brings to three the number of major FNArena database brokers covering the stock. Morgans last updated in May, following the regulation-driven sell-off, at which time the broker highlighted a strong March quarter for the company in China nonetheless. Morgans lifted its price target marginally to $168.10 but retained a Hold rating, believing the stock to be fully priced.

Ord Minnett last updated in February following the company’s half-year result release. The broker at that time was espousing a potential “seismic shift” in the growth outlook for companies such as Blackmores, exposed to the growing Chinese middle class. On that basis, despite the 2015 share price surge, Ords retained a Buy rating.

Then Beijing changed the regulations. On that basis we’ll assume Ords’ $225 target will be readdressed when Blackmores posts its full-year result next month.
 

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