Is this the best value growth stock on the ASX?

Ron Shamgar

TAMIM Asset Management

Investors are constantly on the lookout for growth. Companies growing earnings at double digit rates normaly trade on high multiples - hence finding growth and value at the same time - is hard to come by. Mcpherson's Limited (MCP) is a brand owner within the health, beauty and wellness sector of the market. We believe investors have overlooked the recent successful turnaround, and the acceleration of growth within the core business as the significant earnings leverage starts to kick in. We forecast MCP will earn 14.5c EPS and pay 9.5c of fully franked dividends in FY17. In FY18 we estimate EPS at 17.5c and dividends of 11c. Our forecast places MCP on a forward PE multiple of 7x and a gross yield of 13%. MCP is the largest holding in the TBF Fund. Find out why below.

Business Overview

MCP is currently perceived by investors as a distributor of other brands. But in fact 90% of its $25M of forecast EBIT this year comes from its own brands. The MCP business can be categorized into three divisions, that most Livewire readers regularly use some of their products around the home.

The core growth business is the Health, Beauty and Wellness division which generates circa 70% of forecast profits. MCP’s own products include natural skin care brands A'kin and Dr Lewinn, and beauty and body care brands such as Manicare, Lady Jane, Swisspers and Glam. In addition to its own brands, MCP develops agency partnerships for other brands such as Trilogy skin care and Coty Fragrances. A key growth plank for MCP is further expanding its agency brand portfolio and leveraging its warehouse.

The second division for MCP is its household consumables division which owns the long established Multix brand contributing circa 20% of group EBIT. This division is low growth but a nice cash cow. Multix is vulnerable to a strengthening USD and suffered margin compression last few years as the AUD fell from $1 to 70c. Since then, the cost base has been reduced, price increases pushed through, and the division is back to earning healthy returns. Apart from being a cash cow, Multix is a leading brand in its category providing a strategic sales leverage into the grocery channel for MCP's Health and Beauty brands.

Finally its third division and its smallest contributor of circa 10% of earnings is Home Appliances. This division selling Euromaid, ARC and IAG kitchen appliances is non core and we anticipate will be divested this calendar year. Our industry analysis suggest Home Appliances is worth anywhere between $20-$30M to a strategic buyer. A sale of this division is a huge catalyst for the stock in the near term. Not only it will reduce debt to negligible levels, but will help rerate the stock to an appropriate growth multiple.

Significant Earnings Leverage

The MCP turnaround story has taken several years to play out as non performing brands rationalized, cost base reduced, non core divisions sold and debt levels reduced significantly from over $100M in FY15 to circa $40M by the end of FY17. Hence the reduction in reported revenues has masked the emerging growth and margins, within its core health and beauty brands. While all this has occurred, MCP continued to generate strong cash flows and pay continuous dividends to shareholders.

One of the key highlights from the 1HFY17 result, is the significant earnings leverage in MCP's under-utilized state of the art distribution center in Kingsgrove, Sydney. The Warehouse is currently only 48% utilized and management has highlighted that for every additional 5% of utilization through its own brands or agency partnerships, MCP generates an incremental $2M of EBIT. To put this in context, that's a potential $20M of incremental EBIT over the next few years, over and above on our $30M forecast EBIT for FY18.

The recently appointed MD, Laurence McAllister, who is an ex global executive for Coca Cola and more recently the Pharmaceutical giant, Sanofi, is very focused on increasing earnings by leveraging MCP's Warehouse, refreshing some of its core health and beauty brands and divesting the home appliances division.

Compelling Valuation

We believe investors will wake up to this growth story over the next 6-12 months as the company delivers on its strategy. With an undemanding valuation, a market cap of $125M and a wide open register with not much institutional ownership, MCP ticks all the boxes for an undiscovered growth story in the making. At the moment, MCP is being valued on a low multiple due to the home appliances division dragging it down. A sale of that division should re rate the stock closer to its peers such as Trilogy (TIL) and BWX which trade on higher multiples of 15-25x.

The company is on track to grow earnings at 15-20% pa over the next 3 years. Based on our FY18 estimate of 17.5c eps and 15.7c gross dividends, we value MCP at $2.40 (14x PER) compared to the current share price of $1.20. We expect the market to slowly but steadily re rate the stock over the next 12-18 months. In our view, MCP is one of the most compelling risk/reward opportunities on the market right now.

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Ron Shamgar
Ron Shamgar
Head of Australian Equities
TAMIM Asset Management

Head of Australian Equities for TAMIM Asset Management. Previously Founder & Portfolio Manager of the TBF Small Cap Value Growth Fund. Ron has responsibility for research, company analysis, portfolio construction for the TAMIM All Cap Portfolios.

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