Wednesday, 7 July 2010



Q1 2011 - 7/7/2010

Share Price 21.71. Earnings out 8/7/2010 before markets close.

Recommendation : Buy


Range of brands. Recent purchase of Sure (large market in UK) and Pert Plus (large shampoo market in US)

Paid $69m for the acquisiton.

Approximate sales from acquisition are expected to be around $65m. If assume a gross profit margin of 35% on this acquisition then they will make around $24m per annum on this purchase.

There will be a strain on the SG&A of around say $6m as a result of increased marketing and product support costs for this acquisition. This will still provide for a revenue stream of around $18m. This pays for the acquisition in around 4 years. If there is amortisation of the acquisition costs over 20 years. This will strain earnings by around $3.5m.

Net annual earnings from the acquistion should be around $14.5m with cash flow at around $18m.

Earnings Target

Earnings target for the year is $2.56.

Revenue is expected to be $161,320m.

Q1 sales for prior year were $143m. Including a 6% increase this will bring sales of the existing product range to $151m.

The acquisition is expected to bring in sales of around $65m. Assuming even spread of revenue this should bring in a further $15m. This will bring sales in around $168m. ?? Not sure why analyst are expecting $161m but will see.

The revenue target therefore seems a little off.

Earnings analysis

On $161m of revenue earnings will be $0.58c assuming SG&A stay where it is - based on analyst expectation.

Potential amortisation strain of Pert acquisition as goodwill is amortised.

SG&A Analysis : Incentive compensation costs were $7.06 million lower in fiscal 2009. Incentive compensation is a very high proportion of overall profits. Around 10%. The prior year SG&A was impacted in the main by compensation payments and increased due to the share price increase and low ball targets. We shouldn't see this happening again.

My view is that if I take the prior quarter earnings of $16,658m which gave around 55c and add on say a further $3m from the acquisition we should get around 63-65c prior to any one-time restructuring charges.

Stock Price

The stock price has underperformed the market over the last 3 months.

Other notes

Effective tax rate is around 10%


Both price earnings and valuation look cheap. The company has some debt but enough cash to pay it off. They are acquiring smaller companies to assist with growth and paying out of current cash flow. Although this hits earnings due to the amortisation of acquisition costs, the cash flow increases.

On a valuation basis the company is around $671m in market cap. Revenue is expected to be around $750m. There is also around $100m of assets left after paying off all short and long term liabilities.

Year ended Feb-10 earnings were $71.817m. The recent acquisition should add around $14.5m to that earnings stream. This brings net earnings to around $86.3m per annum giving a PE ratio of around 7.7m.

Cash flow from operating activities should be around $90m. Assuming all paid out as dividend in the absence of growth opportunities - this provides for a yield of around 13% on current market cap.

No comments:

Post a Comment

About Me

I try and work a broadly market neutral strategy and based purely on fundamentals and my gut feel.