BKL distributes branded vitamins and supplements within Australasia and Southeast Asia.
Founded in the 1930s, the company is the leading player in Australia with a 20% market share.
The attraction of this franchise is its strong brand, built on a long track record of quality, which has enabled the company to generate significant returns on invested company.
Looking forward, the bulls argue that earnings growth will be underpinned by: (1.) an ageing worldwide population and (2.) consumers becoming more health conscious.
Partnerships with Eu Yan Sang – one of Asia’s leading healthcare companies - and CJO – a major Korean home shopping network – place the company in good stead with respect to its expansion in Asia, which already accounts for 20% of revenue.
The bears counter that margins are likely to keep falling in Australia, given the price wars being fought between the major retailers (such as Woolworths, Coles, Chemist Warehouse) and increasing competition from lower-cost rivals such as Swisse, which has forced the company to increase its marketing spend.
Historically, the company has been very profitable with return on equity averaging 35.7% for the past three years.
In terms of its debt profile, the company is geared at 80%, which is high for our liking.
However with a forecast interest cover of 7 times and the reactivation of the dividend reinvestment plan placate our concerns somewhat.
On our numbers for 2014, BKL is trading on a prospective 17 times earnings and paying a gross yield of 6.5% - numbers which we feel are undemanding for a company with its track record of above-average earnings and dividend growth.
The stock is suitable for risk tolerant investors seeking a combination of growth and income.
For more information on Blackmores Limited (BKL) please contact us on 07 4771 4577.