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From AFR this morning -

Branded skin products manufacturer and marketer BWX Ltd is believed to be seeking to finalise about a $100 million equity funding package for a new acquisition.
Acquisition is said to be a US-based naturals business. Might favour your currently burning shorts, JSB, depending on the the deal :)


Read more: http://www.afr.com/street-talk#ixzz4vobsYL00


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Yeah, might explain yesterday's rise somewhat.


I daresay organic growth is slowing somewhat - recent deal with Coles has them discounting 40%, which in turn has the existing distributors discounting similar margins to compete. Touting close to 40% EBITDA margins while distributors are in forced clearance mode, especially when Sukin sales are not B2C facing - it's going to be an issue in coming periods.


Sukin as its core brand is not yet offered on its most recent acquisition's platform (Nourished Life), while Mineral Fusion products are. Another US facing Natural acquisition suggests to me that the Mineral Fusion acquisition was staggeringly overpriced for the assets and ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“distribution networkÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ they received ($55m goodwill on a $63m consideration(!), $826k on PPE).


IÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢m expecting higher revenue due to bolt-ons, but lower like-for-like sales, significantly lower EBITDA margins, and big impairments over the next 12-18 months.


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ï‚· BWX Limited (BWX or the Company) has entered into an agreement to acquire

Andalou Naturals, Inc. (Andalou Naturals) for initial consideration of US$80m, plus

potential additional amounts subject to Andalou Naturals achieving particular

financial milestones.

ï‚· Andalou Naturals is a leading skin, hair and body care brand in the US, inspired by

innovative product development and quality natural ingredients and is expected to

generate revenue for FY2018 of US$41m and pro forma EBITDA of US$8.5m.

ï‚· Implied multiple of 9.4x EV / FY2018 pro forma forecast EBITDA, or 8.4x including

expected annual cost synergies1

.ï‚· The acquisition creates a sizeable US operating platform when combined with

Mineral Fusion, enabling management to drive operating efficiencies which are

expected to deliver estimated annualised cost synergies of US$1m by the end of the

first full year of ownership.

ï‚· The acquisition presents the opportunity to expand distribution of Andalou Naturals

and other BWX brands across BWX's broadened geographic and channel footprints.

ï‚· Initial cash consideration of US$64m to be funded via a fully underwritten 1 for 5.7

pro-rata accelerated renounceable entitlement offer to raise A$100m, with remaining

proceeds used to paydown existing debt facilities and fund transaction costs.

ï‚· Approximately 10% EPS accretive on a pro forma FY2018 basis before expected

annual cost synergies.




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Probably a couple of months early on the trade :biggrin: hopefully a few arb funds pick up the shortfall and give me a bit of breathing space.


Gonna need some serious organic growth to make those acquisitions look cheap. Hope they're not relying on halving the marketing budget again and Coles's heavy discounting to maintain that ~40% EBITDA margin!

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BWX has high growth earnings with a valuation to match

BWX acquired Andalou Naturals last month for $US80 million, split 80-20 cash and stock, and with up to a further $US11.2 million of potential consideration payable over five years depending on gross profit hurdles being achieved. BWX raised $100 million from investors to fund this, and pay down debt.


It is the third deal done this year after the company bought US cosmetics brand Mineral Fusion in July for $US38.4 million cash plus up to $US4.6 million over the next 12 months in potential payments; and Australian online retail business Nourished Life in September for $20 million in cash and stock, plus any further payments over the next four years. A smaller raising was conducted for Nourished Life, of $17 million.


These deals are said to complement the homegrown product line Sukin, which BWX manufactures. It sells items from cleansers to moisturises for around $10 apiece, having bought Sukin in 2015.


The stock last traded at $6.72 and looks a reasonable chance of getting into the S&P/ASX 200; it floated in 2015 at $1.50 a share. This success happened in spite of the board's all-male profile (until this year). But BWX is very much the brainchild of chief executive John Humble, and investors have been willing to back him.


BWX, for the record, defines "natural" as being derived from "ingredients such as herbs, roots, essential oils and flowers and combined with naturally occurring carrier agents, preservatives, surfactants, humectants, and emulsifiers". It adds, "should include botanically sourced ingredients currently existing or formed by nature without the use of synthetic chemicals and manufactured in such a way to preserve the integrity of the ingredients".


BWX has also benefited from the daigou factor; its products are not on shelves in China, which requires compliance with animal testing that the company will not entertain. But it has participated in the suitcase trade.


It is just as well then that the business is diversifying its sources of earnings. The pharmacy channel in Australia has experienced the dampening effects of soft retail trade and low wage growth in the economy. Australian Pharmaceutical Industries, the owner of Priceline pharmacies, downgraded in August, citing further declines in consumer sentiment.


Sukin has been picked up by Coles, inviting some murmurs around margins. Gross margin was incredibly high at 65.5 per cent in 2016-17, up from 62.1 per cent (even at $10 a bottle). BWX does not anticipate margin compression from being stocked in supermarkets, a heroic outcome if proven. It is also stocked by Boots in Britain, giving it visibility in the eyes of offshore investors.


BWX is trading on 26 times forecast earnings, and consensus forecasts produce a target price of $7.15, ranging from $6.40 to $7.83. Only 3.7 per cent of the register is held short, according to ASIC's latest figures, although market sentiment is fairly polarised. BWX's guidance is for 2017-18 earnings growth in excess of 30.7 per cent, which puts it on track for more than $34 million EBITDA.


"Whilst we're not giving numbers for out years on the top line, we would expect our bottom line with the introduction of synergies to be able to grow at a quicker rate than the top line," Humble told analysts of the Andalou deal. The business has compound annual sales growth of 22 per cent over three years.


BWX's closest local peer is New Zealand's dual-listed Trilogy, which trades on a less demanding multiple and whose flagship product has organic certification. But Trilogy's gross margin is lower, at 51 per cent, and fell year-on-year. BWX now more closely resembles a junior global player.


The US market for naturals is forecast for compound growth of 8.3 per cent, reaching $US8.5 billion by 2021. This is faster than the personal care market at 3.8 per cent, and those figures are cited by BWX referencing Kline & Company and Euromonitor data. This is predicated on consumers becoming "increasingly educated on the benefits of natural personal care and beauty".


As a manufacturer it is not gripped by the Amazon panic besetting retailers, although its $20 million digital commerce acquisition could be seen as a show of counter-consensus conviction. In truth, Amazon has not smashed it in the beauty category but Sephora and Nasdaq-listed Ulta ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ which is down 22 per cent year-to-date despite 20.6 per cent sales growth in the second quarter, upgrading its third quarter guidance, and buying back $US300 million of stock in 2017 ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ are on their toes.


The naturals boom has given rise to its own category. For example, Mineral Fusion is the "number one natural cosmetics brand in the US" and Andalou is the "number one selling facial skin care brand in the US natural channel".


What is the natural channel? It is the network of natural-feel, natural-targeted retailers from co-operatives to speciality shops monitored by Spins, which is the independent authority on sales. This is complemented by Whole Foods' own data. In the language of channels, Shiseido's bareMinerals, a US mineral cosmetics brand acquired in 2010, is regarded as prestige not natural.


BWX Brands US will speak for all the house brands in the American market, "it won't be three separate businesses", Humble has said. He has been able to articulate where growth will come from: exporting more cheap Sukin units, selling more of the new higher-value brands in Australia, and operational savings. Andalou and Mineral Fusion are based 12 miles away from each other, north of San Francisco and some manufacturing will go to BWX's Dandenong site. That makes it a brave short.


But in August (before Andalou), the company's full-year results left some observers wondering if conditions were indeed tougher than they appeared. EBITDA was "normalised" to the tune of $4.2 million of one-off costs linked to buying Mineral Fusion, which got BWX to $26.4 million, or growth of 30.7 per cent. Guidance for 2016-17 was 30 per cent growth in EBITDA.


Still, the 2017-18 guidance issued in August was to "comfortably exceed" the 30.7 per cent 2016-17 rate of EBITDA growth. It has not deviated from that language three months later.

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BWX, the maker of Sukin skincare, fell more than 20 per cent on Wednesday, and software company WiseTech fell more than 15 per cent, after both companies fell short of market expectations for their full-year earnings.


In BWX's case, investors are looking for 2017-18 earnings of $46.9 million, above the company's newly issued forecast for $42 million to $46 million.


The three acquisitions during the year all falling short of expectations. Based on my calcualtions (pro rata revenue and EBITDA forecasts at time of acquisition over the ownership contribution period), revenue is only 66% of forecast and EBITDA at 44%. A bit problematic as acquisition values were derived from forward-looking EBITDA ratios. There is an awful lot of goodwill on the balance sheet for those acquisitions - the forecast ROA on Nourished Life looks ridiculous based on the consideration breakdown in 8(b) of the notes.


Higher sales from the customer-facing supermarket strategy seems to have displaced the existing pharmacy/chemist channel. Good luck trying to maintain margins on both an out-priced pharmacy channel, and a quick selling product on Coles' shelves. No doubt Goldman Sachs will lower price targets but still set them them well north of fair value. Lower end of forecasts will be tough from here if today's results continue.


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