BWX: Core Brands, Balance Sheet & Digital For Sale

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Brokers trim price targets as BWX outlines its strategic direction for core brands.

-BWX reveals margin guidance ahead of expectations
-Strategic review of the digital business
-Medium-term revenue targets lowered
-Balance sheet concerns

By Mark Woodruff

Following the removal of unnecessary costs and disposal of non-core investments, Shaw and Partners believes BWX Ltd ((BWX)) will re-rate from FY23 onwards.

The broker formed this view following a strategy day held at the company’s new manufacturing facility in Clayton, which included a strategic direction for core brands and disclosure of medium-term margin targets.

Clayton is 2.5 times the size of the previous Dandenong facility and is expected to reduce the cost per online order to less than $2.00 from $5.00 and de-risk the company’s supply chain, while also improving quality controls and stock turn.

The company's operations include manufacturing, wholesale sale and development of natural body, hair and skin care products in Australia and internationally. The focus is shifting from new acquisitions and digital growth towards organic growth for the four core brands of Sukin, Andalou, Mineral Fusion and Go-To.

Management’s long-term earnings (EBITDA) margin guidance of 22% proved better than the consensus forecast. Even so, according to Citi, this outcome was offset after the company stepped back from medium-term revenue targets for its three markets. Europe was the most significant change with a $30-$50m revenue target withdrawn in order to focus on the US.

In a discussion around strategic priorities, BWX management flagged cost-out initiatives of -$5m for FY23 (mainly from redundancies) and a strategic review of the Digital segment (Flora & Fauna and Nourished Life), which Buy-rated Shaw interprets to mean "preparation for sale".

Maybe some of these initiatives are paramount as Jarden is concerned about the balance sheet, with a potential $93m acquisition liability looming in September 2024. Management clarified that a put option held by the founders of Go-To can be exercised by that date at the earliest.

The analyst is also increasingly pessimistic about a recovery in top-line growth and margin expansion given the inflationary environment. It’s believed any cost-out program benefits will be eaten away by higher costs elsewhere in the business.

Because of these concerns and the lack of a more specific plan regarding offshore expansion, Jarden has downgraded its rating to Underweight from Overweight and reduced its 12-month target price to $1.04 from $1.98.

The lower target is due to lower multiples applied by Jarden, not one of the seven brokers updated daily in the FNArena database, to other ASX-listed offshore growth stories such as Breville Group ((BRG)), Premier Investments ((PMV)), Lovisa Holdings ((LOV)), Collins Foods ((CKF)) and City Chic Collective ((CCX)).

The reaction within the FNArena database to BWX’s strategy day was less severe, with the average target price set by three Buy-rated (or equivalent) brokers reduced by just over -6% to $2.50, still suggesting 81.4% upside to the latest share price.

Shaw and Partners, also not one of the seven, retains its Buy rating and marginally lowered its target price to $2.70 from $2.80.

Leverage

Given the balance sheet concerns raised by Jarden it may be timely to review management’s plans detailed at the strategy day to reduce gearing. The metric is expected to fall significantly over FY23 compared to FY22 driven by an unwinding of inventory as the new manufacturing facility scales up.

In addition, higher earnings, no planned major projects and a reduced focus on acquisitions are expected to benefit.

Citi also believes BWX may benefit from divesting its digital platforms for several reasons including a lack of scale and increasing customer acquisition costs. It’s estimated the digital businesses could be worth between $21-$27m.

Delayed revenue targets

BWX has delayed its US skincare revenue target of $100m and $30-50m Europe sales target to at least FY25 from FY23.

Citi believes these amended target dates reflect covid-related rollout delays and other distractions (online, Nourished Ventures), which have impacted on execution for the core brands.

Nonetheless, the broker maintains its Buy rating as Sukin’s value offering is likely to appeal in a high inflation environment. Further, a consumer survey conducted by Citi revealed increased natural skincare consumption during covid, which is expected to be sustained once conditions normalise.

Apart from an appealing current valuation, the analyst also sees distribution growth opportunities in the US.

Other broker views

After Macquarie adjusts its model for BWX’s updated long-term targets, immaterial changes are made to the broker’s earnings forecasts, while its target price falls to $2.20 from $2.40 on management’s net debt estimate for June 2022.

UBS believes the $47m consensus FY23 earnings (EBITDA) forecast is achievable, based on the unwind of FY22-specific headwinds, cost-out, higher gross margins and another three months of Go-To contribution.

UBS feels the current company valuation looks undemanding and bases its Buy rating on the opportunity to expand global distribution. The broker comments the new manufacturing facility tour highlighted the opportunity for efficiency gains and the potential for gross margins to increase over FY23/24.

The broker retains its Buy rating and lowers its target price to $2.55 from $2.70 after revising working capital assumptions.

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