McPhersons Limited (ASX: MCP): Emerging from COVID at a very attractive valuation

McPhersons needs sales to China to grow

McPhersons Limited (ASX: MCP), based in Kingsgrove, NSW, Australia, is a leading supplier of health, wellness and beauty products with operations in Australia, New Zealand and Asia. McPhersons markets and distributes beauty care, hair care, skin care, vitamins, supplements and personal care products. The company also sells a range of kitchen essentials, such as baking paper, cling wrap and aluminium foil.

McPhersons revenue is primarily derived from its diversified portfolio of owned brands, including Manicare, Lady Jayne, Dr. LeWinn’s, A’kin, Swisspers, Moosehead, Maseur and Multix as well as partnered brands, such as Karen Murrell and Dr Wolff. MCP serves supermarkets, discount stores, department stores, pharmacies and independent housewares stores.

 

Weak export revenue crushed the share price

Disappointing export revenues were main the reason for the plunge in MCP’s share price in CY2021, from a high of $3.40 in September 2020 to a low of 78 cents in January 2022. The company mentions the absence of international students’ demand as one of the main reasons for its weak sales to the Chinese market. So, with the international borders now opening up, we believe MCP’s exports can be expected to increase and that would justify a substantially higher share price for McPhersons.

 

 

❶ MCP announces its 1HY20 results. Flat revenues disappoint the market after a rally in the price.

❷ FY20 results show revenue growth and a noticeable increase in underlying PBT despite the impacts of COVID-19. McPherson’s also mentions successful expansion into the Chinese market with its new JV.

❸ MCP raises capital at a discount to the market price.

❹ The company announces a trading update and downgrades its FY21 earnings guidance. It mentions weaker than expected sales to the Chinese market.

❺ 1HY21 results show decreased sales revenues, mostly driven by a decline in exports to China.

❻ McPherson receives an unconditional cash takeover offer at $1.34 per share.

❼ MCP receives a non-binding indicative cash takeover offer at $1.60 per share from Arrotex.

❽ Arrotex withdraws its takeover offer.

❾ A trading update mentions disappointing sales to China with no signs of improvement in the near future.

❿ 1HY22 results show a slight increase in sales year-on-year driven by stronger domestic demand. The company also reports lower underlying EBIT due to increased commodity and sea freight costs.

 

McPhersons is now very attractively valued

Using the information in the company’s 1HY22 report, MCP is trading at a price-to-book (P/B) ratio of 1x with net tangible assets per ordinary share of just 17 cents. The high proportion of intangibles in MCP’s assets is explained by the fact that McPherson’s is a consumer goods company and the most valuable asset of companies in this industry is their brand value.

The company reported a $3m loss for 1HY22, which includes a one-time inventory write-down of $9.4m. With an underlying PBT of $6.7m for 1HY22, MCP has decided to pay a fully franked interim dividend of 3 cents on 18 March 2022 with a record date of 1 March 2022. Assuming a similar final dividend of 3 cents, the dividend yield at the current share price would be 6.6%.

With a very low P/B multiple and a high dividend yield, we would say McPhersons falls within the definition of a value stock at the moment. On top of that, the consensus expectation for EBITDA growth of 16.4% for FY23 makes MCP even more attractive given that its EV/EBITDA for FY23 is only 6.6x.

 

Australia opening up is good news

In its latest announcement, McPhersons mentioned the absence of international students (daigou demand) and tourism as one of the main reasons for its diminishing export revenues. Australia opened its international borders on 21 February 2022 and we can expect the return of international students to Australia.

The company already has stable and profitable domestic sales revenue to justify the current share price level. Therefore, increases in its daigou revenues should lead to higher valuations of the stock, in our view.

 

Risks around travel restrictions and cost inflation

Besides the absence of international students and tourism, the company also mentioned other factors contributing to its weak revenue growth during the COVID period, including constraints in cross-border e-commerce distributions into China.

Additionally, increasing commodities and sea freight costs impacted earnings as well. The price of energy is soaring, which means higher freight costs as well as higher inflation pose investment risks.

 

Our suggested action plan

The share price is on a primary downtrend as the price is still below the trendline (the red line on the chart). The price, however, appears to have found a bottom around 80 cents. The recent market structure also suggests the possibility of a breakout. We think McPhersons has strong fundamentals and entry prices between 80-90 cents with a stop-loss at 80 cents offer low risks and substantial upside potential. Our first share price target for McPherson’s is $1.50.

 

 

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Frequently Asked Questions about McPherson’s

• What does McPhersons do?

  MCP owns beauty, vitamins, supplements and homewares brands that are sold into Australia, New Zealand, Asia and the important Chinese Daigou markets.

• Does MCP pay dividends?

  Prior to COVID, PCP paid 11 cents per share in dividend. Currently, it is expected that the company will pay a 6-cent dividend for FY22.

• Is McPhersons an Australian company?

  Yes, established in 1860, the company is based in Kingsgrove, NSW, Australia.