Blackmores: Won’t be smooth sailing

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
25 February 2022, 1:30 PM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Blackmores' (ASX:BKL) 1H22 result beat our EBIT forecast but missed our NPAT due to higher than expected minorities. Impressively, strong sales growth was reported across International, and ANZ reported double digit EBIT growth. However, China disappointed. The balance sheet remains in a strong net cash position.
  • Management is expecting a similar seasonal EBIT skew in FY22 vs FY21 (66% 1H weighted), implying an FY22 EBIT of ~A$57.5m (+20.8% vs pcp).
  • BKL has a clear strategy to deliver material earnings growth through to FY24. However, trading on full multiples (FY23F PE of 34x), we maintain a Hold rating

1H22 result was solid overall

In 1H22, net sales rose 14.3%, gross profit increased 19.4%, underlying EBIT rose 21.2% to A$38.3m (MorgansF A$36.6m and consensus A$32.7m) and underlying NPAT rose 9.6% to A$20.8m (MorgansF A$21.9m and consensus A$19.9m). Excluding the impact of the A$5.1m SaaS expense adjustment, underlying EBIT and NPAT would have grown 35% and 27% respectively.

China materially weaker than expected; Cashflow & balance sheet still strong

The increase in earnings reflected strong growth from its International business (EBIT +61%) and group margin improvement following supply chain efficiencies and price/mix benefits. The strong International result was underpinned by significant revenue growth in Indonesia (+110%) and Thailand (+51%) and is now BKL’s second largest business segment.

Pleasingly, ANZ reported 14% EBIT growth with mix improvements and significant cost savings offsetting a slight decline in revenue. A&P spend was also lower given it was deferred to the 2H22. Importantly, the business has now stabilised and is trading in line with the overall VDS category.

The China result was materially weaker than expected due to the slowing growth on e-commerce platforms, lower levels of domestic travel and elevated economic uncertainty. 

BKL generated strong cashflow (94.5% conversion) and its balance sheet remains in a net cash position of A$89.4m. The Board declared an interim dividend of 63cps (~60% payout ratio or higher end of policy), which was above our forecast of 50cps.

Guidance implies a weaker than expected 2H22

In the conference call, management said to expect a similar seasonal EBIT skew in FY22 as FY21 (66% 1H weighted). This implies an FY22 EBIT of ~A$57.5m. With A&P spend A$10-15m higher in the 2H, BKL expects its FY22 EBIT margin to increase 60bps on the pcp implying a margin of 8.9% (1H22 was 11.1%). This suggests FY22 revenue of ~A$647.8m, with lower revenue in the 2H.

BKL is expecting ANZ to continue to recover in the 2H, albeit slowly and to aid this it will reduce its out of stocks, accelerate new product innovation and marketing spend will accelerate. The strong performance of International is expected to continue.

However, BKL expects that COVID tailwinds will be less in the 2H vs the 1H, with 2H growth expected to return to FY21 growth rates (+25-30%). In line with the seasonality of the business (Singles Day in the 1H), China’s sales in the 2H will be less than the 1H but will be up on the pcp.

BKL’s Business Improvement Program is on track to deliver annualised gross savings of A$40-42m by end of FY22 (A$36m was delivered at the end of 1H22) and remains on track to achieve its target of A$55m annualised gross savings by the end of FY23.

BKL reiterated its FY24 growth targets which include growing revenue by A$250-350m to A$825-875m. BKL is also targeting to increase its Gross Profit margin to the high 50% and EBIT margin to ~15% in FY24.

Forecast changes

Given BKL’s guidance, increased minorities and materially weaker than expected China result, we have reduced our FY22/23/24 NPAT forecasts by 18.6%/10.0/11.1%. Our FY24 EBIT forecast is now under BKL’s target.

Investment view – Hold rating

After revising our forecasts, our valuation has decreased to (login to view). BKL has a clear strategy to deliver material earnings growth through to FY24. However, growing ANZ’s revenue in line with its targets won’t be easy given structural and competitive threats and this may also be the case for China following today’s weaker than expected result.

Trading on full multiples (FY22/23F PE of 54.9x/34.1x), we maintain a Hold rating.

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