Personal care product manufacturer and distributor BWX Ltd's (ASX: BWX) share price has fallen 13% since the release of a trading update on October 29.
Why has the BWX share price fallen?
The trading update revealed that the company expects normalised FY19 earnings before interest, tax, depreciation and amortisation (EBITDA) to be flat at $40.3 million. This disappointed the market as it had priced in a higher amount factoring in the first full-year contributions from the 2017 acquisitions of Andalou Naturals and Nourished Life.
Furthermore, the trading update also noted that BWX expects a 70% EBITDA skew to the second half. In other words, first-half EBITDA for FY19 is projected to be around $12 million. This would represent a fall of about 31% over the first half of FY18. When you factor in that the contributions of Andalou and Nourished Life were for 2 and 3 months respectively in the first half of FY18, the deterioration in earnings is even larger. The decline in first-half earnings has been attributed to the impact from the company's change programs, platform improvement processes and the failed management buyout.
Can BWX turn this around?
In order for BWX to hit its EBITDA target of $40 million, second half EBITDA would have to grow by 24% over the prior corresponding period. The market appears skeptical on whether BWX can hit this target which has been reflected in the sell-off subsequent to the release of the trading update.
The market has also raised concerns regarding BWX's flagship brand and highest margin segment Sukin. Although Sukin delivered organic growth of 6.1% in FY18 following the ongoing international expansion and its entrance into the domestic grocery channel via the Wesfarmers Ltd (ASX: WES) owned Coles, the growth was skewed towards the first half. Revenue for Sukin in the second half of FY18 fell 19% over the first half and was down 5% compared to the second half of FY17.
Foolish takeaway
The consensus earnings per share estimate for FY19 has fallen to 20.04 cents today from 25.06 cents a month ago. This is lower than the 21.5 cents of underlying earnings the company generated in FY18. At current prices, the stock is trading at a forward valuation of 14 times earnings.
The failed management buyout, slowing growth from Sukin and underperformance relative to acquisition forecasts of Mineral Fusion and Nourished Life has seen BWX fall out of favour after being one of the market's growth darlings in 2017.
If the company can turn around its fortunes then today's price represents good value. FY20 estimated earnings for BWX are currently 25.75 cents, which prices the stock at only 11 times earnings. However, given the company's recent track record in not meeting earnings expectations, it might be reasonable to hold off from opening a position until BWX reports its half-yearly in February. The report should provide some clarity on whether the company's new management team has turned around the business and whether it can return to growth.
In the meantime, investors may want to consider other beaten down shares such as A2 Milk Company Ltd (ASX: A2M) and Bellamy's Australia Ltd (ASX: BAL).
