BWX Limited

BWX Details

CEO Succession: BWX Limited (ASX: BWX) focuses on the natural segment of the beauty and personal care market by developing, manufacturing, marketing, and distributing of the related products. As per its 13^th January 2022 update, Mr Rory Gration (current Group COO) has been promoted as Group CEO and Managing Director (MD) of the group, effective from 1^st March 2022.

Recent Updates:

• Strategic Partnership: On 7^th January 2022, BWX confirmed that it completed its Tranche III related to five-year equity linked strategic partnership by issuing 503,779 shares with Chemist Warehouse Group.
• Final Consideration in Go-To Skincare: On 24^th December 2021, it completed its acquisition of 50.1% controlling interest in Go-To Skincare.

Top Line and Bottom Line FY21:

• The company’s total revenue reported was ~$194.08 million in FY21 versus ~$187.68 million in FY20. Its net profit increased from ~$23.68 million in FY21 to ~$14.72 million in FY21.
• The company closed its accounts with a cash balance of ~$70.50 million at the end of 30^th June 2021 versus ~$28.64 million at the end of FY20.

Cash Balance Highlight (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19: The company is vulnerable to the risks associated with the impacts of COVID-19 and the new variant Omicron and affects the employees, operational functions, and thereby profitability.
• Supply Chain and Competition Risks: The company operates in a market of stiff competition and where it might also be a victim of supply chain constraints as the pressure comes due to COVID-19 restrictions.

Outlook: The company’s acquisition of Flora & Fauna expects strong revenue growth and will make its EPS accretive in FY22 and even stronger in FY24 due to arising synergies. The new operation facility in Clayton, Victoria is expected to unlock significant EBITDA growth, incremental earnings from July 2022 and it has a four-year payback period. It will add to accretive EPS from FY23 and onwards.

With an expectation of retail market recovering, the company has its complete focus on strengthening brand equity, strategies to capture greater market share, pursue on organic and inorganic growth, global distribution, more targeted marketing investment, new product development, operational and manufacturing efficiencies and develop dedicated D-2-C (Direct-to-Consumer) business unit. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The stock of the company has been corrected by ~28.14% in the past six months. Currently, the stock is trading below the average of its 52-week low and high levels of $3.39 and $5.63, respectively. The stock has been valued using the EV/Sales based relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). After considering the commodity price fluctuations, expected cyclical effect of Omicron COVID-19, supply chain disruptions, and increasing in cash cycle days, the company can trade at a slight discount to its peers. For the purpose of its valuation, peers like McPherson's Ltd (ASX: MCP), Lovisa Holdings Ltd (ASX: LOV), Blackmores Ltd (ASX: BKL) have been considered. Considering the expected synergy arriving from the acquisitions, indicative upside in the valuation, D-2-C strategies, reducing debt levels, current trading levels, rise in revenues, and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the closing market price of $3.59, down by ~1.644% as on 20 January 2022.

BWX Daily Technical Chart, Data Source: REFINITIV

Synlait Milk Limited

SM1 Details

Partnership with Danone: Working in a dairy processing area, Synlait Milk Limited (ASX: SM1) operates in the manufacturing of nutritional solutions, specialty ingredients and value-added products. Recently, SM1 has joined hands with Danone - science provider AgResearch & the Ministry for Primary Industries’ (MPI) Sustainable Food and Fibre Futures Fund – to help farmers by incurring research on tools to enhance the soil health and identify how regenerative practices can make difference. The project will run research on ten different farms in Waikato, Canterbury, and Otago for five years.

Top Line and Bottom Line FY21:

• The company’s total revenue marginally increased by ~5% Y-o-Y with a total sales volume of 218,758 MT (~12% increase Y-o-Y) and reported revenue as ~NZ$1,367 million in FY21 versus ~NZ$1,302 million in FY20. The drive was owed to Dairyworks’ revenue of ~NZ$229.0 million in FY21 Vs ~NZ$92 million in FY20.
• After straight nine years of profitability, SM1 recorded its net loss for FY21 of ~NZ$28.5 million (~66% decline on a pcp basis) due to the rapidly changing infant nutrition market in China and the blue-whip effect caused by “The a2M Company” reducing the large forecast volume (infant formula).
• In October 2021, the company introduced its first consumer foods product under its brand – Synlait Swappa Bottle (a reusable stainless bottle).
• The company closed its accounts with a cash balance of ~NZ$16.02 million at the end of 30^th June 2021 versus ~NZ$5.88 million at the end of FY20. The net debt remained at ~NZ$479.4 million.

Cash From Operations Highlight (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19: The company is vulnerable to the risks associated with the impacts of COVID-19 and the new variant Omicron and affects the employees, operational functions, and thereby profitability.
• Supply Chain and Competition Risks: Due to the large forecast volume (infant formula) reduction caused by “The a2M Milk Company” (Bullwhip effect), SM1 had to switch to ingredients production suddenly, and it faced shipping delays, which made the company suffer on new customers acquisition and achieve the usual ingredients premium. It increased SM1’s over-dependency on a single product and one market.

Outlook: The company remains on track to efficiently execute the strategy planned in the last quarter of FY21 and some governance changes to shareholders. With the CEO appointment, SM1 plans to reset its banking arrangements, release cash from inventory, and improve working capital management. The aim is to provide robust profitability in FY22 & FY23. In FY22, SM1 expects an off gain of ~NZ$17 million from the sales and leaseback of the land and building in Auckland.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The stock of the company has been corrected by ~7.14% in the past six months. Currently, the stock is trading below the average of its 52-week low and high levels of $2.64 and $4.59, respectively. The stock has been valued using the EV/Sales based relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). After considering the commodity price fluctuations, expected cyclical effect of Omicron COVID-19, and FY21 losses, the company can trade at a slight discount to its peers. For the purpose of its valuation, peers like Food Revolution Group Ltd (ASX: FOD), Tassal Group Ltd (ASX: TGR), Beston Global Food Company Ltd (ASX: BFC), and others have been considered. Considering the inventory management in future, indicative upside in the valuation, reducing debt levels, current trading levels, rise in revenues, and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the closing market price of $3.26, up by ~0.307% as on 20 January 2022.

SM1 Daily Technical Chart, Data Source: REFINITIV

Wellnex Life Limited

WNX Details

1HFY22 Financial Updates: Wellnex Life Ltd (ASX: WNX) operates into the health and wellness sector and distributes consumer-focussed related products. It was listed on ASX on 15^th March 2017. The company released its 1HFY22 results on 7^th January 2022.

• Revenue: Despite continuous lockdowns and global supply chain disruptions, by accumulating additional stocks in advance WNX managed an increase of ~18.5% Y-o-Y in its total revenue from 1HFY21 to ~$8.84 million (unaudited) in 1HFY22.
• Margins: With the introduction of new brands and products, the company been able to efficiently increase its margin by ~14.1%, as compared to ~33.1% on a pcp basis.

FY21 Top and Bottom Line:

• Revenue & Net Losses: The company reported an increase in total revenue of ~$1.19 million for FY21 versus ~$934k in FY20. Also, the net losses for FY21 decreased to ~$20.12 million from the net losses of ~$65.44 million in FY20.
• Balance Sheet: It closed its final accounts with the cash and cash equivalents as of 30^th June 2021 at ~$7.77 million versus ~$1.12 million at the end of 30^th June 2020.

Cash Balance Highlights (Source: Analysis by Kalkine Group)

Key Risks:

• Fluctuations in Demands and Sentiments: Due to the changes in customers’ preferences and sentiments, WNX is susceptible to the dynamic environment and its everchanging demands.
• Supply Chain Disruptions: Due to perpetual lockdowns, the company’s operations and sales volumes might get affected by supply chain disruptions.
• COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company can be impacted by the lockdown regulations, affecting its sales.

Outlook FY22: With the support of additional products and existing distributions agreements, WNX is all on track to achieve a pre-set target of ~$21 million of revenue for its FY22. With an aim to introduce new brands and products, it continues to increase its margins by ~14%. The main drivers for the second half of FY22 will be:

• Its brands “Wakey Wakey” and “The Iron Company” will be launched on Woolworths stores in the March quarter of FY22.
• Another brand Wagner Liquigesic brand is all set to expand its distribution, and new product launches Chemist Warehouse.
• With the commencement of the supply agreement with CH2, its pharmacy pwn brand is also set for launch.

Stock Recommendation:  The stock of the company has been corrected by ~17.49% in the past six months. Currently, the stock is trading below the average of its 52-week low and high levels of $0.082 and $0.170, respectively. Considering its 1HFY22 growth in revenue, new brands and products launches, supply agreement with CH2, minimal debt levels in FY21, current trading levels technical analysis mentioned below, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.098 as on 20 January 2022, 01:00 PM (GMT+10), Sydney, Eastern Australia.  

Technical Analysis: On the daily chart, WNX prices are sustaining above the horizontal trend line support level. The momentum oscillator RSI (14-period) is trading at ~49.63, reversing from the lower level. The prices are trading above the trend-following indicator 50- period SMA, which may act as a support level for the stock. The crucial support level for the stock is placed at AUD 0.092, while the key resistance is at AUD 0.110.

WNX Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV 

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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