Slap on some Warpaint

Cosmetics merchandiser is a profitable growth and income play
Thursday 24 Nov 2016 Author: James Crux

Investors should keep an eye out for eyeliners, lipstick and nail varnish seller Warpaint London which joins AIM on 30 November.

Owner of the ‘W7’ brand, the £62.6m business has a clear global growth strategy and a cash generative model that should support progressive dividends.

Guided by joint chief executives Sam Bazini and Eoin Macleod, the colour cosmetics seller has raised £2.5m of new money. The CEOs are also getting £20.5m from selling part of their holdings. We understand it is in a net cash position.

Pretty prospects

Buckinghamshire-based Warpaint sells keenly-priced colour cosmetics in multiple countries. Its core, higher margin ‘own-brand’ division consists mainly of flagship brand W7, sold into high street retailers and independent beauty shops.

Customers include B&M European Value Retail (BME), ASDA and Australia’s My Chemist.

Outsourced manufacturing of W7 enables rapid production and competitive pricing, with W7 exports growing rapidly in Europe and the US.

The lower margin ‘close-out’ division is a useful source of insight into market trends. It buys and sells the excess stock of branded cosmetics and fragrances such as Rimmel and Max Factor to resell to discounters.

Warpaint will use AIM to grow organically and via acquisitions. The focus is on promoting and growing the W7 brand, expanding the product range and investing in e-commerce to drive sales in the US and China. Management plans to launch a W7 vegan range.

It has a track record of buying the rights to brands from other sellers. For example, it bought Outdoor Girl from Procter & Gamble (PG:NYSE) with the intention of selling branded products to customers at a cheaper price.

Lipstick effect

Warpaint is a profitable, cash generative operator in a cosmetics market that has demonstrated resilience through economic cycles, often referred to as ‘the lipstick effect’.

The valuation also looks reasonable. Warpaint is being priced at less than 2.4 times Stockdale’s £26.5m 2016 sales estimate, from which £6.4m pre-tax profit (2015: £5.4m) is forecast.

Revenue is forecast to hit £31.8m and pre-tax profit at £7.6m in 2017. Dividends are expected to commence soon. We understand the yield could be in the range of 3.5% for 2017, based on the IPO price of 97p.

Risks to consider include a reliance on the joint CEOs, potential for intellectual property infringements, a material exposure to Australia’s My Chemist and the fact Warpaint buys in dollars. Weak sterling is potentially a benefit as overseas sales grow.

Colour cosmetics is a cut-throat business, yet Warpaint London looks to be an agile operator. We’d rate the stock as a speculative buy once it starts trading. 

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