BWX Ltd (ASX:BWX): management fightback

May 24, 2018

Glennon Capital likes companies where management has skin in the game. It also is partial to a roll-up and doesn’t mind some exposure to international expansion where it is reasonably safe. BWX satisfies all of those categories.

 

We wrote about the stock back in early April when a less than perfect interim profit result (explained poorly at the time by management) saw the share price weaken considerably. Our argument in support of the stock was that it had a stellar history, had recently acquired the number one organic skincare and makeup brands in the US, was rolling its Sukin brand out in Australian supermarkets for the first time and also staked its position in the Australian online market with the purchase of Nourished Life. It has had a lot on its plate, which goes some way to explaining the short term disruption, but which also gives the group multiple growth options in multiple geographic markets.

 

 

 

We had already bought a small position but accumulated more as the share price fell through March and April (during which time we met the company twice). We were comfortable with the long term story and were happy to pick up stock at the cheaper valuation.

Now the management of BWX, most notably the CEO John Humble and finance director Aaron Finlay (who together own 10.4% of the company), have joined forces with private equity group Bain Capital to bid for 100% of the company. The bid may succeed or may not and is subject to plenty of conditions including the go ahead from independent directors. But at the very least it has cut through the speculative noise created by short sellers (up to 20% of the stock was shorted), put the focus back on the valuation and highlighted how important it is to have management financially aligned with shareholders.

 

Even after the takeover-associated share price rally the valuation is still not onerous. The FY20 forecast PE ratio is around 14.8x and the stock pays a dividend (also a sign that management is invested and that the financials are in relatively good shape with very little debt). That is not expensive against the Australian market, but against its international peers it is cheap. The likes of Estee Lauder and L’Oreal trade 3-4 PE points higher. It also is not expensive for an immature owner of multiple market leading brands across numerous geographies with the opportunity to push each brand into the markets where it has gathered strong distribution (ie Sukin into the US, Andalou and Mineral Fusion into Australia, and all brands into Asia).

We share the frustration felt by management in recent months and applaud them doing something about it. The company has grown its earnings per share by 28%, 42.6% and an expected 22% in the years since FY15 when it already had an established earnings base. We expect the trend to continue as its new brands are pushed out. BWX traded higher than $8 in January so the $6.60 bid price might fall short of investor expectations. We are happy to hang on for the story to play out. But at least our initial patience in seeing through a misjudged market has paid off.

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