BUY HOLD SELL – McPherson’s Limited (ASX: MCP)

McPherson's Limited (ASX: MCP) is a supplier of health and beauty, consumer durable and household consumable products in Australasia. The company has operations in Australia, New Zealand and Asia. The health and beauty division markets and distributes beauty care, hair care, skin care and fragrance product ranges. The home appliance division markets and distributes appliances, such as ovens, cooktops, washing machines and dishwashers. The household consumables division markets and distributes kitchen essentials, such as plastic bags, baking paper, cling wrap and aluminium foil.

• MCP key brands in health and beauty include Manicare, Lady Jayne, Dr. LeWinn's, A'kin, Glam by Manicare, Revitanail, Swisspers, Footcare, maseur, Moosehead, DaVinci, Eylure, Elegant Touch and Goodness.
• The key household consumable brand is Multix, whilst key home appliances brands include Euromaid, IAG, Elica and ARC.
• In August this year MCP delivered results which, whilst significantly down in the year prior, please the market.Full-year net profit came in at $6.1m versus$13.7m a year earlier.
• Underlying profit before tax (PBT) was $22.8m, bang in line with prior guidance, whilst revenue came in at $222.5m, up slightly on company guidance.
• The company also declared a final dividend of 7 cps, fully franked. MCP didn’t provide any guidance, saying “the high level of uncertainty regarding progression of the COVID-19 pandemic and its impact on both the global and domestic economies make accurate forecasting of the FY21 year extremely difficult”. The market took all of this in its stride and pushed the share price up from 285 on the morning the results were delivered, to 340c just a couple of weeks later.

Then, the music stopped. The company provided a trading update on October 20, which looked good. Q1 underlying PBT came in at $2.9m vs $1.6m a year earlier. Sales revenue was $47.9m, up 4%. Not scintillating but hardly disastrous. The company also noting that the majority of brands continue to grow their category market share, with four of six core brands increasing market share over the year ended Sep-20. Furthermore, the group's Manicare, Lady Jayne and Multix brands all recorded double-digit growth in sales revenue in comparison to the same time last year, while sales from LeWinn's continued its growth in the Export channel, albeit at a seasonally slower pace. Finally, MCP provided what appeared to be a solid outlook, with H1 underlying FY21 profit before tax growth expected to be in the range of 20-30%, whilst full-year underlying PBT growth was expected in the 5-10% range. The company also said; “given the strength of our balance sheet and the forecast growth in underlying earnings in FY21, the Group's policy of paying a minimum dividend of 60% of underlying profit after tax, subject to cash requirements, remains unchanged. Given that the forecast growth in underlying earnings, we expect a dividend for FY21 that will be equal to or above the dividend declared in FY20”. So, what caused the share price to collapse from above 300c, down to 220c? Well, clearly the market wanted more. As good as those numbers were, they didn’t meet expectations. Furthermore, the company announced an equity raising on October 27, launching a fully underwritten $36.5m institutional placement priced at 227cps, and a SPP to raise a further $10m. The placement/SPP was to fund the acquisition of Global Therapeutics – a division of Blackmores which includes the Fusion Health and Oriental Botanicals brands. Ultimately, the market didn’t like the price (both of the asset and the placement), and it doesn’t seem to like the deal. This appears an overreaction however, and ultimately, an opportunity.                                      

• ROE is solid averaging around 16-17%, and expected to remain in that region in future periods. Anything approaching 20% is very good.
• Revenue growth is also solid, at 11% currently and expected to remain healthy - although trailing off – in future periods.
• EPS growth is currently in double digits and expected to remain so over the next two financial years. This a good to see as it highlights increasing efficiencies and economies of scale being realised.
• The yield is very healthy, at 5.6%, and expected to push beyond 6% in future periods.
• The stock is covered by four brokers, three of which have a STRONG BUY and one of which has a BUY rating
• MCP is trading at a 32.7% discount to the consensus price target of the four brokers surveyed by Thomson Reuters

WHAT SORT OF INVESTMENT IS MP1?

MCP is a growth stock. In FY20 the company experienced 21% domestic growth, with MCP core brands (both domestic and international) growing 1.5x ahead of the categories they participate in. Innovation success has been a key plank of the growth strategy and as at the August results, there were some 220 projects in the innovation funnel. The company is also looking at ways to leverage macro trends to drive future growth, with Chinese export, proactive beauty, sustainable solutions and COVID new normal the key areas of focus. The other growth plank is the acquisition strategy, which brings us back to the Global Therapeutics deal. In our opinion the deal fits well in terms of MCP’s strategy to acquire products with growth potential and which can be assimilated easily into the existing distribution networks. As much as 25% upside for short-term earnings is envisaged from the acquisitions according to some brokers, which makes the negative share price action even more interesting. Perhaps the mix of debt/equity within the capital raising was the turn-off.

SHORTING

The chart below looks alarming, with the spike recently, but once you look at the scale you realise there is little to worry about. Less than 0.5% of the free float is shorted. Yes, it’s up, but it’s up from nothing to a level that still is largely irrelevant. Move along, nothing to see here.                          

SHORT TERM TECHNICAL VIEW

                                The chart above looks nasty but the price action is showing as oversold. There have been two big wipe-outs in the past 12 months, one the COVID driven slump in March, and one the recent dip on the acquisition. Outside of those two periods, the share price has shown a healthy ability to trend higher.

TOP INVESTORS

Not much to see here but, on balance, there has been more buying than selling from key investors. Challenger has been buying up, as have Challenger and Lennox Capital Partners.

CONCLUSION

To find out what we recommend you should do with this stock, sign up for a free trial today [activecampaign form=64]