issued AFTER the shareholder meeting. They see A$106 as fair value -
COMPANY UPDATE
Blackmores Ltd. (BKL.AX)
Neutral Equity Research
Factoring in supply chain and procurement benefits from 2H18
What's changed
We attended BKL’s shareholder event in Sydney, where BKL provided
detail on its key segment markets and areas of focus. In China, BKL
expects the CBEC (cross-border e-commerce channel) to remain the main
channel to market, but noted that the offline channel holds the greatest
long-term potential, although we note this is dependent on a more
favourable regulatory framework from the CFDA (which if implemented
should accelerate approval times for BKL’s supplements).
Implications
Key take-outs for us were on costs and operational efficiencies:
(1) Through the rationalization and renegotiation of its raw material and
contract manufacturing arrangements, BKL expects to see a c.5% gross
margin improvement on current levels. We expect part of this benefit will
be reinvested in other initiatives, i.e., branding, marketing, customer
support, and hence have factored in a partial realization of these savings
mainly in FY19E. (2) BKL’s new distribution centre in Western Sydney
provides 16,000 sqm of warehousing space, is operational 24/7 and can
support up to double the capacity of BKL’s existing warehouse. We factor
in minor savings from operational/automation efficiencies.
Valuation
We increase our FY17/18/19 EPS by +1.1%/2.9%/4.0% as we factor in BKL’s
supply chain and procurement benefits, and incorporate our Economics
team’s latest FX forecasts, particularly a depreciation of the AUDCNY rate
to 5.15/5.21/5.29 from 5.27/5.51/5.68. Our 12-month price target (85%
fundamental value based on DCF and EV/GCI; 15% M&A value based on 3-
year average EV/EBITDA of 15x) is up 3% to A$106, in line with our EPS
changes.
Key risks
(+) Strong demand for new products. (-) Weaker margins.
BKL Price at posting:
$93.81 Sentiment: Buy Disclosure: Held
