Date : 28/10/2020

McPherson’s Limited

ASX :

MCP

Market Cap : $266.62 Million

Dividend Per Share : $0.07

Dividend Yield : 4.45 %

Buy

52 Week Range : $1.30 - $3.40

Share Price : $2.28

Positive earnings during the first quarter has been overshadowed by the acquisition and equity raise. We recommend members to "Hold" their positions.

Company Analysis

McPherson’s Limited (ASX: MCP) has been all over the place since March. The stock bounced back very quickly from the crash as consumer demand in a recovering China surged. The stock currently trades at $2.28 after a series of tumbles for the past two weeks.


Source: Tradingview.com

The Q1 FY2021 update that was released by MCF was positive. The firm has seen a 4% growth in revenues and $2.9 million in profit before tax – an 84% increase from Q1 FY2020. Among the brands the firm own, it has seen a strong 8% growth in sales compared to the same quarter last fiscal year. The CEO added that 4 of their 6 brands have increased their market share during the pandemic.

The firm took a bit of a hit in the hand sanitizer department. MCF was unable to supply hand sanitizers on time and this resulted in the firm having to write down its inventory as customers cancelled orders. The loss from this transaction has not been accounted for in the numbers the company published.

While the write-down is non-recurring, it would still add a bit of drag to its financials. The core businesses, however, have performed well. Sales in China were reported to be strong as the ABM partnership has benefitted the firm. The first half of FY2021 is forecasted to show further growth in revenues and profits. The guidance forecast received from MCP shows a 20%-30% increase in profit before taxes compared to corresponding time in the previous year. In light of these forecasts and strong growth that has been seen during the recent quarter, MCP’s dividend policy is unchanged – investors can still expect a minimum of 60% payout from profit after taxes MCP reports.

Mergers & Acquisitions

MCP had already mentioned that they are keen on M&A’s and they even established a team just to source M&A opportunities. The biggest move made so far is the acquisition of Global Therapeutics from Blackmores Limited.

Global Therapeutics is a manufacturer of herbal and complementary medicine formulations in Australia & NZ. It commercialises through two brands – Fusion Health and Oriental Botanicals. While MCP says that the acquisition has a strategic edge where in the firm can grow its booming health & wellness segment, investors have not taken the news well. The halt in trading earlier this week did not do MCP any favours – which is usually the case. Investor fears usually intensifies when trading halts are in place.

The acquisition at an Enterprise Value of $27 million for a segment that has generated revenue of $19.5 million EBIT of $3.7 million (unaudited) in FY2020 is rather expensive. This is a 7.4x multiple for a business that is relatively stable and does not drastically increase the growth for MCP through synergies. One of the biggest synergies we estimate to benefit MCP is the distribution network Global Therapeutics will bring to the table.


Source: MCP

The acquisition is also being funded by an equity raise. MCP has raising $36.5 million in a fully underwritten institutional placement and another $10 million via a Share Purchase Plan (SPP). The funds from the placement is to be utilised for the acquisition, while the remaining is to be utilised for working capital needs and future M&A’s.

The SPP is expected to be completed on the 19th of November at 2.5% discount to the volume-weighted average of MCP shares during the week. The share price for the SPP will also be lower than the $2.77 placement price.

Recommendation

A lot has happened during the month of October at McPhersons. Despite the negativity surrounding the acquisition, the fundamentals of the existing business remain strong. McPherson’s headwind during the pandemic seems to still be in place as it is continuing to gather marker share. We understand that the share purchase plan will have quite a few our members eligible. We will continue to monitor the stock and update members regarding participation close to the date. Until then, we urge members to “Hold” on to their positions.

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