Blackmores Limited
The company is a market leader in the natural health care business with three core brands- Blackmores, BioCeuticals and Pure Animal Well-Being. It generates around $ 450 million in revenue and has a market capitalisation of approximately $ 1.2 billion. A public company for 30 years, it operates in 14 countries including Australia, New Zealand, Malaysia and Korea. Every year it releases a total of 35 million products to more than 25,000 distribution points and almost 40% of its revenue is generated outside its core market. It is regarded as one of the most trusted brands in Australia and Southeast Asia. In 2014, it trained in excess of 10,000 healthcare professionals (HCP' s) and offered accredited training to doctors, nurses, pharmacists and pharmacy assistants. It has been in Asia for over 35 years where it employs 350 employees and all its markets have strong local management teams. 20% of the workforce are qualified HCP' and its network of online members and friends run into almost 1,000,000.
Market opportunities and strategic focus
The changing dynamics in the market open up new opportunities for the company which require focus. These include an ageing population and increasing costs of healthcare and pharmacies are facing significant changes in their customer requirements as customers increasingly demand personalised service. In an increasingly Asian world, there is more emphasis on sustainability, proven efficiency and the use of natural ingredients. This is why Brand Australia has significant potential in Asia because of its match with heritage and quality. Finally, additional opportunities are being created by the evolution in food habits and the opening of the China Free Trade Zone.
In the last six years, the company has more than doubled its business and aims at doing so again on its strategy foundations of customer centricity, product leadership, operational effectiveness and growth in Asia. There will also be a continuing process of collaboration with strategic partners.
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Strategic priorities (Source: Company Reports)
Operational effectiveness will be built up by building capacity and improving efficiency. One sourcing and negotiation team is being set up for the group as a whole which will invest in strong partnerships with suppliers. Investment in expertise will continue to maintain high quality standards, leverage innovation in ingredients and support business expansion as will investment in the Campus at Warriewood. Financial management will be beefed up with stronger inventory management, Treasury strategies to reduce the risk of currency volatility and improve cash management as well as new optimum banking arrangements.
Nine-month performance update
The nine-month performance continues to follow a strong financial trajectory and for the nine months to 31 March 2015, group sales were up by 28% to $ 326 million. Sales in Australia were up by 35%, in Asia by 18%, in BioCeuticals by 19% And in Animal Health by 34%. Improved CGS and better quality expense management resulted in an increased EBIT margin from 11.1% to 14.4%. The expenses for the year to date include incentives worth $ 8 million which did not show in the previous year. The NPAT for the period at $ 31 million was up 76% over the same period of the previous year and 22% from the full year FY 2014. The underlying cash position continues to be robust with net debt at $ 37 million down 48%, operating cash flow up 118% and a cash conversion ratio of 118%.
The third quarter performance showed a record quarter and the company is well on its way to a record profit for the full year. Record sales continued to show an upward trend with quarter 1 sales up 70% to $98 million, quarter 2 sales up 26% to $ 108 million and quarter 3 sales up 42% to $ 119 million. Sales in Australia were up 48%, in Asia up 44% (90% ex Thailand) and BioCeuticals up by 23%. EBIT performance was impressive as the margin grew from 11% to 17% and higher quality cash and debt management saw a decline of 38% in interest costs. The profit performance for the quarter was a record $ 12.2 million a growth of 125% and the comparative figures for the first two quarters were $ 8.7 million for quarter 1 (growth of 61%) and $ 10 million for quarter 2 (a growth of 48%). The stage is set for a record profit performance for the full year analysts expecting a figure of between $ 40 million and $ 44 million.
Blackmores Daily Chart (source - Thomson Reuters)
The progress against the strategic priorities for FY 2015 are given below. Against the priorities of growing the business while returning to profit growth, growth in sales at the end of the third quarter is 29% and the profit performance is strong. Against the strategic priority of being recognised by consumers as their preferred brand, the company continues to win market share with growth in all channels including the traditional ones. Finally, against the strategic priority of product innovations, new health solutions, getting closer to customers and successfully executing channel strategy, the company has launched its Big Brand idea to build brand loyalty and has been nominated as the Most Trusted Brand for the sixth year.
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Some key financial metrics (Source: Company Reports)
The is no doubt that the results over the last nine months have been nothing short of spectacular and that the focus on expansion into Asia and exploiting the middle class markets is fundamentally sound on a long-term basis. The real problem arises when you look at the 160% + growth in the stock price over the last one year and examine the stock as an investment in the light of the present prevailing stock price. The P/E ratio is extremely high and the stock looks distinctly overvalued and expensive at the current price. This kind of P/E ratio can only be justified if the company continues to grow at a frenetic pace and this has yet to be established. All in all, we believe that the stock is too expensive at the moment unless you happen to be highly optimistic about its growth prospects. We believe the stock is expensive at the ccurrent price and would review the stock at a later date.