Sleeping Beauty


Up over 275% since its ASX debut… is BWX expensive? This sleeping beauty could be about to wake up as a tenbagger. 

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Step 1: Good skincare regime; Step 2: Profit


BWX is an Australian based owner, producer and distributor of the following personal care brands: Sukin, DermaSukin, Uspa, Edward Beale, Renew Skincare, and Mineral Fusion. It originally started out as a contract manufacturer to the skin care industry but over time transitioned to being a vertically integrated skin care company by purchasing brands. As it stands today, the third party manufacturing side of the business has shrunk as the focus of the company is solely focused on its flagship brand, Sukin. It represented 83% of revenues in FY16 and is set to grow, while it is already the No. 1 selling skin care brand in Australian pharmacies.

Brand positioning

Sukin is positioned as a “masstige” product with pricing being accessible to the mass market but offering luxury characteristics. Strong category growth of the natural skin care market has been supported by a shift in consumer preferences towards: cleaner and greener products, increased health and safety concerns, environmental concerns as well as awareness of the potential threats posed by synthetic chemicals commonly found in skincare products. This trend is here to stay as millennials drive the eco-conscious consumer mindset, but most current natural products command a material pricing premium to chemical based counterparts. Sukin sets itself apart by offering a vegan, carbon neutral, chemical free, paraben free natural product at almost the same price as standard products. This ethos is aptly captured by their motto printed on each of their bottles (which is recyclable, of course) – “Skincare that doesn’t cost the earth

Sukin range

BWX’s natural skin care focus represents advantageous category exposure. FMCG itself is seen as a defensive sector as people still brush their teeth and wash their hair in an economic downturn (one would hope), but home and personal care (“PC”) specifically is seen as an attractive segment due to higher margins. As a result PC focused stocks (Procter & Gamble / Beiersdorf) command a valuation premium to Food FMCG stocks (Nestle / Danone). Within PC, the largest market is skincare, which is expected to post the strongest market growth from CY14 – 19 (per Euromonitor estimates). Drilling down deeper, the natural segment of the market is expected to grow faster than the overall category. Sukin is well positioned to benefit.

Geographic expansion

In FY16, only 22% of Sukin sales were from overseas. So far, the story has been the domestic success however, over time we the real upside to be derived from RoW sales currently targeted at New Zealand, China, Singapore, Malaysia, UK, US and Canada. The ability for Sukin to replicate its success in these markets represents a vast opportunity with many of the addressable market sizes outstripping local potential (e.g. UK skin care market size is c. 2x Australia).

Management takes a measured approach to new market entry via independent distributors, and subsequently once established they set up a direct distribution office on the ground to service larger clients. This blueprint has been followed in the UK where previously they sold via independent distribution but in mid-2016 pivoted to direct distribution through the establishment of a sales office and warehousing after they secured shelf space with the largest health and wellness retailers in the country. While the success will ultimately be determined by the “pull” from the customer, the driver of earnings in the near term will be the ability of BWX to establish distribution partnerships to “push” the product to as many shelves as possible.

We see promising signs thus far with their entry into the UK as key retailers (e.g. Boots) have increased the number of stores stocking Sukin, with further runway available. While the market opportunity is substantial in the UK, China is a whale of a market for skincare products. Sukin’s reputation is boosted in the eyes of the Asian consumer by the positive connotations attached to the natural healthy Australian image. Just look at Chinese affinity for Swisse pills or A2 Milk to gauge the type of premium attached to Australia’s food, health or natural exports. Initial steps taken by management to establish stores on TMall and are ideal first steps to go direct to the Chinese consumer.


On July 3rd the company announced the acquisition of Mineral Fusion (“MF”), the No. 1 natural cosmetic brand in the US. The deal was fully debt funded for a consideration of US$38.4m, and a $4.6m earn out. The market did not seem to react to the announcement yet this is one of those few times where an acquisition may actually generate a very high IRR for the acquirer, despite the premium transferred to the target. Given the guided EBITDA range for 2017 is US$3 – 4m, this deal looks pricey at first glance given the implied acquisition multiple of 11 – 14x EV / EBITDA however it is worth considering the strategic potential.

Firstly, the factors that make Sukin attractive in Australia make MF appealing in the States. This is clear as its exposure to the natural cosmetics category has helped drive a 3-year sales CAGR of 20%. Secondly, the complementary nature of the acquisition is clear as 77% of 2016 sales for MF were from cosmetics and nail care. MF core sales represent new segments for BWX that will add width and diversification to the BWX stable, allowing BWX to drive more volume through its established distribution in ANZ and abroad. Thirdly, while the US is a massive market with consumer preferences similar to other western countries due to fierce competition and difficulty with distribution it is notoriously tough to build a brand there without burning cash. The MF platform represents a ready-made US distribution arm for BWX to enter the US market, something that may prove invaluable over the long term. Finally, as the acquisition is debt funded it will increase leverage to 2x net debt / EBITDA post integration which, given the cash generation of BWX, will not stress the balance sheet. Rather the utilisation of debt headroom will drive shareholder gains through earnings accretion. Despite the nauseatingly common parroting by corporate press releases of a “match made in heaven”… this could be one of those times.


Marketing strategy: The key differentiator of BWX to other branded PC products is its marketing spend. While maintaining similar or lower gross margins, the reason for industry leading EBITDA margins is due to its spend on sales and marketing of 10% of sales comparing favourably to international competitors at 25 – 30%. This competitive advantage is derived from the word of mouth endorsement of Sukin by women who love the product, which has and always will be the best form of marketing out there. BWX choose to utilise digital media and influencers to promote their brand rather than traditional media, a far more effective return on investment due to the increased likelihood of a young woman trying out a new product recommended by a blogger they follow. Bloggers are more likely to be perceived as a trusted source compared to just another billboard or commercial. Beauty bloggers are all powerful in this space as lead influencers, and if you want proof ask any young woman what beauty blogs they read and you will soon unearth a whole new side of the internet. Blogs upon blogs with high traffic, devoted to discussing Napoleon Perdis vs. MAC (pretend like you know) as a much more worthy match-up than Mayweather vs. McGregor. Another valuable bit of market research is to google “Sukin blog review” and read some of the bloggers reviews of the products, or give their Instagram page a visit to see the engagement they nurture with their core demographic. A far more valuable feedback tool for consumer investing than sell-side research.

Blue = “Sukin”; Red = “Mineral Fusion”

Interesting trend in search queries – 100% growth of interest for both Sukin and Mineral Fusion over the past 3 years


Capital light growth: Even though it is vertically integrated, BWX should be able to support further growth as it has in the past with minimal capex (1 – 2% of sales)

Management: The management team and board have extensive FMCG experience and have been around the company for a long time overseeing substantial growth thus far. Moving forward this group who have to date made all the right moves are incentivised to keep growing the brand since key senior personnel have the majority of their net worth derived from paper fortunes in BWX stock (CEO John Humble holds 10% of shares outstanding)


Customer concentration: A concerning characteristic of the Australian pharmaceutical market is the relative concentration of a few key players such as Priceline, Terry White, and Chemist Warehouse. BWX derived 50% of its FY16 sales from three customers and it is plausible that these customers may attempt to exercise market power to squeeze BWX margins or demand volume based promotional discounting as Sukin grows. This however seems unlikely while the Sukin brand remains attractive and customer loyalty is high

Competition: Currently competing with MNC and other nature focused company sub brands such as Nivea, Olay, Jurlique, Trilogy, Natio, Burts Bees. The revolution of natural products has not gone unnoticed as FMCG majors will increasingly seek to enter and dominate the sector, not ceding share to smaller names. As such, it is likely competition will increase in the “masstige” segment of the market. A natural mitigating factor to this is the personal importance of skin care to most women and the high customer retention rates once a product is established as a part of a skincare regime

Execution: The downside for BWX is that overseas consumers tastes deviate from Australian consumers and overseas growth does not pan out. Under such a scenario, domestic sales are likely to hit a ceiling over the medium term and the multiple is likely to de-rate as it could go ex-growth

Brand deterioration: While highly unlikely, a scandal attached to the Sukin brand that adversely affects its natural image or results in a recall would be a disaster for the company. Bloggers may also take a negative view of the brand as Sukin is currently not “organic certified” which some posts online have already noted

Poor execution: This risk is particularly relevant within the Chinese market. It is uncertain what proportion of domestic sales are derived from informal “diagou” sales channels, however estimates have put it at 10 – 15%. The risk of entering China too quickly via e-commerce channels may be that diagou margins are compressed and the diagou promote other Australian skin care brands over Sukin to their Chinese clientele. Another risk to the Chinese market is regulatory changes that are currently delayed indefinitely by the government are introduced whereby Sukin will be effectively locked out of direct sales into China due to requirements for products to be animal tested

Brand building expenses: New markets take increased discounting to grow distribution and higher brand building costs, compressing margins


In terms of valuation, on first glance at the share price chart it feels as though we have missed the boat on BWX due to the stunning run up in price since the $1.50 (!!!) issuance in November 2015. This is due to the company soundly beating its prospectus forecast through outperformance of Sukin. Share price has continued to appreciate due to a raft of earnings upgrades and improving analyst commentary, but as we consider the investment today is there significant upside to the lofty ambitions the market has given the company credit for already?

Based on management guidance and consensus estimates (Annual results are due in a few weeks) on a trailing basis for FY17, BWX trades at c. 22x EV/EBITDA (assuming $50m of acquisition debt related to MF) and at 31x P/E. While the pricing on face value seems stretched and beyond the grasp of a traditional value investor, this fails to recognise the obvious growth potential and momentum of the business. On a forward basis utilising FY18 consensus, BWX trades at c. 15x EV/NTM EBITDA and 23x P/E NTM. The upside from these levels is significant as the growth levers attached to geographic expansion, exposure to underlying consumer trend shift to natural products, operating leverage and cross selling between Mineral Fusion and Sukin means earnings can continue to grow substantially off a relatively low basis for many years to come.

Traditionally, due to the mature nature and similar capital structure of many FMCG businesses most stocks within the sector trade on a P/E basis, with multiple premium reliant upon profitability and growth trajectory. Looking at the valuations of a PC peerset (JNJ; PG; OR; ULVR; CL; EL; BEI) shows trading levels of 20 – 28x forward P/E for lower growth than BWX (albeit all these conglomerates hold a much higher quality stable of diversified brands). Increasingly stretched valuations over the past few years in a post-QE world may be inflating this but considering comparables we can expect BWX to trade at an EPS multiple in the future of 20x given the higher growth profile. From a cash flow perspective, the FCF yield on the business may seem weak over the near term however; cash conversion from EBITDA to FCF is not reduced due to capex but rather NWC investment to support growth. Upside from buying at these levels is clear when you consider the very real possibility of EPS growing threefold from current levels.


Buy. Expensive at $5.65, but cheap when considering the growth opportunity for BWX. While expansion carries risk, the reward on offer gives us confidence to be a buyer at current levels. Will likely require patience as a multi-year expansion plays out and there will be bumps along the way.

Disclosure: I am long BWX (ASX: BWX)

iSentia, putting the story back together.


Isentia Group Limited (ASX: ISD) is a media intelligence software-as-a-service provider positioned to service a range of corporate and government clients. Established in 1982 as a traditional press-clippings business, iSentia today holds a dominant position in the ANZ media monitoring market.

iSentia has its traditional standard media monitoring offerings as well as value added services (VAS) which includes social media monitoring and analysis/insight reports and other services.

Mainstream media monitoring comprises the bulk of the firm’s revenues (circa two thirds) and is generally paid for via subscription (some legacy clients pay via the volume of articles read, however this is being phased out).

For clients, media monitoring services start out with a basic ‘mainstream media alerts’ service that sends out relevant notifications via email/text once every 24 hours for a recurring fee. Customers can upgrade to online news notifications for an additional recurring fee and to the Media Portal platform (which provides live updates and is also the platform for media analysis) for another recurring fee. A range of other premiumised services is layered on top.


Buyer beware

Do you know who weaves a great story? Roadshow bankers. Now take those bankers, have them pushed by private equity firms, and they will be able to sell oil to the Saudis. I am generally sceptical of an IPO since the reason for floating is usually not in the buyers favour (taking money off the table, couldn’t get a trade sale away, etc.), but if there is one thing to always be sceptical of, it is an IPO from a private equity vendor. Now that does not mean every PE exit is a dog, just that there is a very high likelihood the major upside has been harvested… with just enough meat on the bone to survive a lock-up period.

Special IPO gift bestowed on the market from our PE pals.


The story – Did we land on Mayfair?

The narrative on the back of a hot offering (offered at $2.03 with an opening pop of c. 20%) was picked up by the market feverishly. iSentia was a critical media aggregator for corporates and governments alike, with a 90% market share in Australia representing a quasi-monopoly that would levy price increases upon its customers into perpetuity. As it delivered strong ANZ earnings growth, the narrative strengthened and the market bid up the price to a market peak of $4.85 as momentum led to analysts extrapolating past growth far into the future.

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Keep printing money.


Narrative break – Do not collect $200 for passing Go.

Benjamin Graham described Mr.Market as a manic-depressive who is emotional, euphoric and moody. The flip side of such euphoria is punishing when companies are priced for perfect execution. The narrative of iSentia fell apart quickly when people realised that this may not be the cash cow monopoly they initially expected. A confluence of factors hit as: (i) Meltwater, a global player with strong social media capabilities made a concerted push into Australia pressuring iSentia’s pricing; (ii) Traditional media outlets put up paywalls and extraction of value from content came into focus – leading to increased copyright costs; and (iii) King Content, the $48m acquisition into an adjacent service (content marketing) went sour with integration issues and momentum loss causing a projected EBITDA contribution to swing to a loss.

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Monopoly man falls on hard times.


Where are we now?

While the outlook for iSentia is vastly different today from 2 years ago, the core of the investment case remains the same. The compelling reasons that were initially there to buy it remain:

  • High quality top line stemming from durable recurring domestic software as a service (“SaaS“) revenue
  • Diversified customer base
  • Pricing growth from upselling

Monitoring requirements for organisations in a more complex and disparate media environment are growing rather than shrinking, entrenching the product need to end users. iSentia continues its pivot to add social media capability while the continuous investment into R&D is critical, allowing for the roll out of new products that enable pricing increases and ensuring a product edge ahead of competitors.


While its cloud capable platform analysing a multitude of media sources is difficult to replicate, global competitors have similar offerings that may be portable to APAC clientele. The threat to iSentia’s moat moving forward is unlikely to materialise from a superior product offering from current competitors but instead from increased churn of larger multinational clients to a holistic solution from a global player. MNCs may prefer a single provider for worldwide media coverage, rather than the regional offering currently promoted by iSentia. Given iSentia’s average revenue per user (“ARPU”) the ability to move down-market to mid-market and smaller firms is limited due to prohibitive costs for end users, hence defence of their core large cap clients is critical. Short-term churn will likely drive price action as the market is sensitive to the threat of Meltwater eating into ISD’s client base, but it will prove difficult for Meltwater to meaningfully alter the long term market structure given iSentia’s 90% penetration. Pricing differential alone is unlikely to induce switching; only offering an advantage when pitching to end users without any current external media analytics. Rather a product edge is required – Meltwater’s core competency is social analytics, while iSentia is (perhaps late to the game) substantively beefing up their social analytics. This has been fleshed out via the addition of sentiment analysis within their core Mediaportal platform as well as completely new products focused on social such as Storyboard. A full product suite serves as the best ongoing defense to their moat, mitigating the risk of ANZ churn. The market appears to be pricing in a negative forward view of ANZ churn, as the Macquarie Australia Conference presentation catalysed a 15% jump in the stock price. The important new information to come out in that deck? Not much… apart from a line on p. 18 that “Q3 client churn returned to historic norms”. A short term stabilising of customers was enough to drive a 15% recovery in SP, hence once the overhang of Meltwater’s initial impact clears and iSentia’s market share retention is clearer to the market we can potentially expect a further recovery. Barring a multi period large scale hemorrhaging of customers, it is fair to ascribe a value to the ANZ business on a standalone basis similar to current trading levels as management continue to drive steady ARPU growth via upselling.

Growth option

The true upside to iSentia and potential for share price appreciation lies within the option value of new markets. The growth strategy communicated by management has been focused on markets with no established player and initial roll out was within Philippines, Malaysia, Thailand, Singapore and Vietnam. iSentia is well placed to capture a leading share in these nascent markets, with no incumbent as a roadblock to establishing client relationships in the region. Management estimate they only serve c. 25% of their target clients in S.E Asia, therefore there is substantial runway left for growth.

Localised players such as Wisers and Hottolink that operate in China and Japan respectively make entry more difficult in other Asian markets; however, this can be treated as a free option with even small penetration into such large addressable markets likely to move the needle. Asia is a key plank of the investment case moving forward, and iSentia have made promising early strides as well as placing the right people in the driving seat with the hire of David Liu (long time media exec, with regional experience as Aegis AsiaPac head) indicative of their appetite for growth.

What could the future look like?

To invest into iSentia means you need to take a view on the following operational drivers:

ANZ customer churn: The critical short-term data that will influence sentiment and market consensus on whether iSentia can restore its former glory. I personally model net churn to peak in FY18 at 5% with a slow deterioration of clients thereafter, as Meltwater steadily chips away

ANZ SaaS pricing: There are two choices for iSentia to battle Meltwater, retain pricing power and risk churn or retain customers and have pricing deteriorate. The latter would be the wise choice. As such, the pricing growth into perpetuity premise is broken and a hit to pricing for basic SaaS products is likely on the horizon

ANZ upselling: Consistent product innovation allows ARPU to grow as clients utilise more products, with opportunity for value added services to increase penetration within existing base. Value added services penetration within existing customer base increased c. 600bps over the two years to FY16, but it is likely this rapid growth will slow, as the largest clients with the biggest budgets are exhausted

Asia customer net adds: Difficult to gauge what the runway will be like but based on the total addressable end markets they are targeting it is reasonable that total customers for rest of the world will increase by 50% by FY25 – this doesn’t translate into strong penetration in target growth markets but is representative of promising client growth

King Content: The turnaround is underway with a new unit head for King Content and it may not turnaround, but the acquisition has a scrap value if jettisoned. Content Marketing does not have the attractive defensive qualities of the core business therefore it is difficult to forecast, however a conservative case is projected with revenues falling until FY18 and stabilising thereafter.

Content acquisition costs: The trend of content for traditional media being paywalled and becoming more expensive is likely to continue and as such, a spike in copyright costs is forecast for FY17 as a new equilibrium is found

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King Content’s new CEO has parachuted in just in time.




(Un)fortunately the SP has been grinding higher since I started writing this post, with $1.50 at the outset morphing into $1.90 at the time of publishing. Remains attractive at current levels – consider adding to your portfolio at any price below $2 as the risk/reward skews to the upside with my valuation implying a 25% margin of safety at $2. Entry point offers sufficient downside protection via the core ANZ SaaS revenues, which are relatively sticky. The market will react in the short term to domestic churn, but as churn and pricing impact from the heightened Meltwater competition stabilises the share price will recover. Upside to be driven by a re-rating in the stock to trade in line with SaaS peers as well as meaningful upside within the Asian growth story – an option we are happy to pick up on the cheap at current levels.

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Disclosure: I am long iSentia (ASX: ISD)