Date : 11/09/2020

McPherson’s Limited

ASX :

MCP

Market Cap : $318.84 Million

Dividend Per Share : $0.07

Dividend Yield : 3.77 %

Buy

52 Week Range : $1.30 - $3.40

Share Price : $2.92

MCP is stock trading at high levels. However, we see growth coming its way as it takes advantage of the Chinese market as a priority. The firm is financially sound with health dividend payout ratio of 72%. Hence, we give this a “buy” recommendation.

Company Analysis

 

McPherson’s Limited (MCP) is a wholesale supplier of health, beauty, and personal care products. The firm has been around since 1860 and currently operates in Australia, NZ, and parts of Asia. Its product offerings are well diversified within the personal care and health & beauty industries through a variety of brands such as A’kin, Dr. LeWinn’s, Swisspers, etc. The firm claims to serve close to 10,000 retail outlets in its operating locations – that includes supermarkets, pharmacies, retailers, etc.

MCP is looking to stabilise and grow their business in NZ and Singapore and then expand to create a China facing business as they look to break into the one of the biggest consumer markets in the world. Mergers & Acquisitions is of primary concern as MCP is focussed on creating a new team just for M&A opportunities.

Company Updates


Source: Tradingview.com

The recent surges in the stock price in the month of August were due to the release of the firm’s FY20 results, and its divided distribution announcements.
The company has recovered most of its dip in the March meltdown, as demand for cosmetics and wellness products increased as people worked from home during the pandemic restrictions. Its recovery of the stock has been so impressive that it was recently trading at a 5-year high at A$ 3.40.

The firm has seen an increase in sales revenues across its brands in FY20, compared to FY19. Skin, Hair & Body was up 59%, essential Beauty and Household essential increased by 1% and 2%, respectively.

The core brands of MCP have seen a 1.5x growth during the pandemic times. Much of this surge in demand has come from China – which was the earliest to recover from the pandemic and the economic slump.

Industry Analysis

The health, wellness, and beauty collectively are an A$17 billion market in Australia, where Health accounts for A$4.9B, Wellness and Beauty at A$5.6B and A$6.5B, respectively.

A few note-worthy macro trends are below. These macro-economic factors have been one of the most prominent reasons for the recent surge in the stock price of MCP.


Investment Thesis

Dr. Lewinn’s products have seen a rapid growth in sales – mainly driven by China.

MCP has announced fully franked ordinary dividend of 11 cents per share at a payout ratio of 72% of the FY20’s earnings per share (EPS). The dividend is payable later this month.

Debt levels of MCP has been relatively stable in the past three years. This is a good sign especially coupled with the fact that its earnings and revenues have increased. Operating income has increased by 32% over the last financial year.

The total revenues saw a growth of 5.8%. This is expected to continue as the macro factors and industry trends forecast stable increase in revenues. Return on Assets gives us an idea on how the firm’s assets have performed. An increasing trend here is a sign of strength as it means it is doing more with what it has – complementing our theory of a growth in demand for MCP’s products due to the change in consumer behaviour.

With assets performing high, firm generating increased income from operations, and growth in its Chinese business, the future forecast looks bright in an industry that is growing. The last check would be to look at the firm’s financial health by analysing the capital structure and its assets and liabilities to measure its resistance to its risk exposures.

There has been a slight change in the capital structure with its debt levels going up by A$ 6.8m. Currently, MCP is financed by 78.5% equity and 21.5% debt. The increase should not cause any concerns to investors as this is healthy mix of equity and debt.
The total assets exceeds total liabilities by 1.93x, while current assets are exceeding current liabilities by 1.5x. The firm also has A$ 7.1m in cash reserves – all indicating its in good shape for any risk management measures it would have to take in the future. The cash levels have come down from FY19’s high of A$ 13.4m. We believe the decrease is due to strategic long-term investments the firm has taken on.

Recommendation

MCP’s future looks bright. We forecast a stable business with a strategy focussed on growth as it continues to expand into Chine – a huge consumer market with soring demands. MCP has a good mix of products and channels that are thriving under the conditions of Covid-19. The financials back up the fundaments outlook we hold with strong performances of its assets. MCP is also paying a healthy dividend to its shareholders a payout ratio of 72%. We are giving the stock a “Buy” recommendation with a bright future outlook over the medium to long-term.

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