Why we think BWX is worth watching

Why we think BWX is worth watching

A little-known company we hold is BWX Limited.  This small Melbourne-based company owns a range of skin and hair care brands.  It also manufactures cosmetics for third parties.  Shares in BWX began trading on the ASX in November 2015 at $2.12.  They have doubled since then, and we think there’s more good news ahead.

BWX derives most of its earnings and value from its flagship Sukin range of ‘natural’ skin care products.

Australia was an early adopter of natural skin care, and Sukin was an early mover into this market, where it has resonated with consumers.  It is positioned as a “masstige” product, sold in pharmacies but not supermarkets. Following several years of strong growth, Sukin is the No. 1 selling skin care brand in Australian pharmacies, having displaced globally-recognised brands for the title.

This market segment continues to grow strongly as consumers become more attuned to the merits of natural products, and BWX has worked to extend the Sukin range, add new outlets and improve sales execution.  In the first half of FY17 this saw Sukin’s domestic sales grow by an extraordinary 48%.

While BWX manufactures the Sukin range itself, the capital intensity of the business is surprisingly low, and these very strong growth rates have been achieved with minimal investment in new capital.  Accordingly, the economics of the business are highly attractive.

But what makes BWX really interesting for us is the opportunity for the company to replicate some of its Australian success in much larger overseas markets. The company has been working to have the Sukin range distributed in several overseas markets, and the early signs are encouraging.  In the UK for example, the leading health retailer, Holland and Barrett, has retailed a small selection of Sukin products in 142 stores, and recently decided to offer a wider range of products throughout their 765 store retail network. Similarly, Boots UK sells Sukin in over 160 stores, and there is potential to extend into its 2,500 strong retail network.

Further opportunities are at varying stages of development in Canada, China, and other markets, and BWX expects these to make a meaningful contribution to earnings in the years to come.  It is clearly difficult at this stage to gauge the ultimate success of Sukin in these markets, so any valuation analysis needs to contemplate a wide range of possible outcomes.

One thing is clear though – the top end of that range is well beyond anything currently priced into BWX shares.  A combination of favourable market trends, the right product, good execution and a global opportunity could make BWX a much larger business than it is today.

The Montgomery Funds own shares in BWX.

MORE BY TimINVEST WITH MONTGOMERY

Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

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