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BWX On The Expansion Trail

Small Caps | May 20 2021

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

Flora & Fauna has become the latest entry to the BWX stable, adding a sustainable and ethical product platform to the range of personal care brands

-Significant expansion opportunity for BWX brands
-Strong strategic move to build online offering
-US expansion remains the largest opportunity


By Eva Brocklehurst

Expansion is nigh for BWX Ltd ((BWX)) with the acquisition of Flora & Fauna, an Australian online retail platform for ethical, sustainable and vegan products. The acquisition will be funded by debt and is expected to be strongly accretive by FY24 through realisation of cost synergies. Macquarie calculates earnings accretion of 6% in FY24.

Citi observes the acquisition should enable BWX to expand distribution of its major brands such as Sukin, Andalou and Mineral Fusion onto the Flora & Fauna platform. Conversely, the Flora & Fauna label could be introduced to Nourished Life and, potentially, Chemist Warehouse.

BWX will pay $27.9-30.8m for Flora & Fauna, based on FY21 revenue targets that equate to an historical revenue multiple of 1.6-1.8x. The acquisition multiple is comparable to Adore Beauty ((ABY)), which is trading at 1.7x. This reflects well on the latter, which has more active customers and ten times the sales.

Bell Potter considers Flora & Fauna a strong strategic fit as BWX builds out its online offering. Along with Nourished Life this will form the basis of a broad offering in the B2C (business to consumer) segment within the BWX portfolio and provide a benefit from operating efficiencies.

Flora & Fauna/Nourished Life

Citi assesses there is just 13% brand overlap with Nourished Life and this provides significant opportunity to cross-promote. Since acquisition, Nourished Life has not performed as well as Moelis expected yet strategic value is envisaged in combining the two businesses from both the cost and revenue perspective.

The company could eventually consolidate the warehouses of both businesses into its new facility once constructed, and immediate gains should ensue from marketing efficiencies.

The cost savings should drive an uplift in margins for both businesses and BWX is expected to reinvest some of the savings back into marketing. Moelis believes this is a sensible way of growing market share and should set the business up well for the future.

The broker points out the trend to ethical and sustainable products has grown strongly in Australia and should be a structural tailwind, providing BWX with improved access to a younger and more ecologically concerned consumer.

Still, short-term performance will be dependent on cost synergies, and top-line growth in the medium term on execution. Flora & Fauna has a wide range of categories such as baby, pet care and household products which compares with the current BWX portfolio that is essentially beauty and personal care.

Incorporating the acquisition Bell Potter, with a Buy rating and $5.70 target, upgrades forecasts for operating earnings by 2.9% and 5.0% in FY22 and FY23, respectively.

The broker agrees BWX will benefit from greater online retail distribution and enhanced capabilities across its Australasian and international offering while the main risk lies with integration, given BWX has made a number of acquisitions fairly recently.

Moelis expects BWX will pursue further innovation around waste reduction and plastic-free packaging that can be trialed on the Flora & Fauna site before being rolled out to retailers.

Double-digit growth domestically has occurred over the past three years and is expected to continue along with a shift to online sales, where the new direct to consumer business of BWX should deliver commensurate growth.

US Potential

Nevertheless, the largest opportunity rests with expansion into the US mass market for the Andalou, Sukin and Mineral Fusion brands and while the strategic rationale of acquiring Flora & Fauna makes sense Moelis hopes it does not distract management.

The recovery in shop-based business in the US post the heights of the pandemic has been substantial and the broker remains optimistic BWX can resume penetration of additional retailers.

Moelis increases FY22-23 estimates for earnings per share by 1-5% to reflect the acquisition and retains a Buy rating with a $5.61 target while Macquarie adds 2-3% and raises the target to $5.40, maintaining an Outperform rating. Citi, too, upgrades estimates for FY22 and FY23 net profit by 1% to account for the acquisition and has a Buy rating with a $5.60 target.

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