Blackmores: Encouraging progress is being made
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 01 March 2021, 2:00 PM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
- BKL’s 1H21 result was better than guided to with 8% NPAT growth vs expectations
that it would be lower than the pcp. Strong results from the China and International
businesses, cost out, EBIT margin expansion, solid CF conversion and balance
sheet strength were the highlights. Consequently dividends have resumed
although at a lower than expected payout ratio.
- In line with the seasonality of the business, 2H21 EBIT should be slightly lower
than the 1H. The next update is likely at BKL’s Investor Day on 22 April.
- The progress management has made, as demonstrated in the 1H21, gives us
confidence that BKL can be successfully turned around. However trading on an
FY22F PE of 33x, we believe BKL is fully valued and maintain a Hold rating.
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1H21 result – beats guidance
BKL’s result was better than expected (8% NPAT beat). With revenue growth slightly
below expectations, tight cost control appears to explain the beat.
savings/efficiencies of A$7m were realised, comprised of A$4m in supply chain savings
and A$3m of lower operating expenses. The EBIT margin was 110bp higher at 10.2%.
Divisionally, ANZ was weak (travel restrictions materially reduced foot traffic in the higher margin
pharmacy channel and led to increased discounting), whereas China (EBIT +26%
on pcp) and the International business (EBIT +61% on pcp) delivered strong growth.
Operating cashflow was also stronger than expected and the balance sheet is in a solid
position (A$73m net cash – no debt).
The Board declared an interim dividend of 29cps
(vs. nil the pcp), which was below our forecast of 60cps.
BKL flagged the future likelihood
of investing in its digital and communication sales channels and will provide further detail
on this front at its upcoming Investor Day (22 April). BKL said that e-commerce sales
across the group are 25% of group revenue. At this stage most of the growth is coming
from China however BKL sees a big opportunity in Australia.
Outlook: 1H earnings skew – expecting solid FY21 earnings growth
BKL’s 2H21 result is expected to be stronger than the very weak pcp (was loss making)
but lower than the 1H21 due to lower revenue and increased advertising and promotional
spend in the 2H21.
FY21 earnings growth reflects the combination of strong growth from
the China and International operations, cost savings (A$18m total), price rises from 1
October 2020 and further mix benefits.
BKL’s Business Improvement Program continues
to target A$50m of savings by FY23 however half of these benefits will be reinvested in
marketing, sales and innovation, with particular focus on its Asian operations. Its efficiency
program is expected to materially increase BKL’s margins which are lagging peers.
Following a stronger than expected interim result, we have increased our FY21/22/23
NPAT forecasts by 3.2%/3.5%/4.3%.
In line with the seasonality of the business (China’s
key selling events are in the 1H), we have assumed a 1H vs 2H EBIT split of 55%/45% in
Given BKL will reinvest cA$10m in its inventory position in the 2H21, we expect
FY21 cash conversion will moderate (vs. the 1H21).
Investment view – Hold rating
The 1H21 result gives us increasing confidence in the turnaround at BKL and the
opportunity to materially increase margins over time. This along with solid top line growth
should produce strong earnings growth over coming years. However trading on full
multiples (FY22F PE of 33x), we maintain a Hold rating.
Following forecast changes and
given BKL’s stronger than expected cashflow generation and net cash position, our
valuation has risen.
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