Earlier today, diversified consumer products supplier McPherson's Ltd (ASX: MCP) announced its preliminary results for 2016. The company has three divisions which are Health and Beauty, Home Appliances and Household Consumables and sells through well-known brands such as Manicare, Euromaid and Multix.
Although sales revenue fell by 10.5% to $312.6 million, underlying net profit after tax (NPAT) rose 12.7% to $13.5 million and underlying earnings-per-share (EPS) rose 9.7% to 13.6 cents. The market responded well to the news with the stock up 15.8% to $1.10 in early afternoon trading.
The company was able to grow profits in spite of falling sales because it discontinued some lower margin product ranges during the year. For example, it divested its Housewares business which accounted for most of last year's extra revenue.
The result is more impressive than it first seems given the majority of McPherson's direct costs are in US dollars which strengthened significantly against the Aussie during the period. The company managed to counteract this effect through price rises and cost reductions.
McPherson's balance sheet strengthened considerably with net debt down by 35.3% to $49.9 million. $20 million of the $27.3 million drop was due to the divestment of the Housewares joint venture, but also cash conversion was strong given the company paid $3.4 million of dividends.
At current prices McPherson's has an enterprise value-to-earnings ratio (EV/E) of 12. This compares favourably with GUD Holdings Limited (ASX: GUD) which has an EV/E of 23 and is also a diversified supplier of consumer products. GUD is much larger than McPherson's and is increasingly focused on automotive products whereas McPherson's is targeting the health and beauty sector.
Health and Beauty now contributes 48% of McPherson's total revenue, up from 39% two years ago. Consequently, the company has reduced its dependence on the big supermarkets and is increasingly selling through the more profitable pharmacy channel.
In 2014, McPherson's started distributing Trilogy branded "natural" skincare products on behalf of Trilogy International Ltd which is listed in New Zealand. Trilogy's share price is up 397.8% in the last year and its NPAT jumped 108% in 2016 on the back surging sales of its Trilogy range.
Trilogy is the top selling "natural" skincare brand in New Zealand and revenue in Australia rose 45.8% to NZ$10.5 million in 2016 through the distribution agreement with McPherson's. Trilogy has the potential to be a key earnings driver for McPherson's in future years given the Australian "natural" skincare segment grew by 38% in the year to 13 December 2015.
At some stage currency rates will stop working against McPherson's and management appear to be doing a decent job of cutting out the deadwood. Furthermore, focusing on the high growth "natural" skincare industry appears to be a sound strategy and so McPherson's could be one to watch.
