The share price of personal care product manufacturer and distributor BWX Ltd (ASX: BWX) has fallen 31% since the release of its half-yearly results for the December 2017 period on February 21. Following the earnings report, short interest in the stock has also soared from 4.42% to 8.70% as at March 19.
What happened?
BWX delivered a first half result that was below the expectations the market had priced into the stock. The company went on a significant acquisition trail in 2017, purchasing the businesses of Andalou Natural, Mineral Fusion and Nourished Life.
This resulted in revenues for the first half rising 79% to $67.2 million with normalised earnings before interest, tax, depreciation and amortisation (EBITDA) climbing 37% to $17.5 million. Normalised earnings exclude the $5.5 million one-off acquisition and restructuring costs that saw normalised earnings per share increase by 20% to 10.4 cents. However, after stripping out the earnings from the acquired businesses, we can see that the growth rate of the company's flagship brand Sukin has dropped.
BWX announced last year that it had agreed a distribution deal with the Wesfarmers Ltd (ASX: WES) owned Coles to distribute Sukin in its supermarkets from mid September 2017. Net revenues for Sukin for the period rose by 17% to $36.4 million. This contrasts with the prior corresponding period's growth rate where the Sukin brand increased revenues by 59% on the back of new outlets, improved execution domestically and rising exports to overseas markets.
The outlook management provided for the full year also fell short of market expectations. The company expects FY18 EBITDA to be within the range of $42 million – $46 million. One reason for the lower guidance is the company's new national distribution model that will see it discontinue distributing third party brands. This will reduce full year revenues by approximately $6.5 million as BWX intends to concentrate on maximising the returns from its own brands.
Foolish takeaway
The miss of earnings estimates and a weaker outlook has seen the company's valuation multiple shrink. BWX's products are competing in a fast growing sector within the personal care and beauty industry and its international expansion plans are another future driver of potentially significant growth.
The distribution of Sukin in the U.S. will begin in the second half of FY18 and the company will need to execute its value proposition to gain market share in a highly competitive market. It will also take time for the company to integrate its acquisitions and deliver any synergies.
The derating of the stock post earnings now sees it trade at a more reasonable valuation of around 22 times projected FY18 earnings. While further downside risk exists, the stock remains one of the more compelling mid cap stocks on the Australian market and one investors ought to be watching.
