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Swoop on personal care-to-beauty products play for growth and income
Thursday 15 Mar 2018 Author: James Crux

This is an opportune moment for growth and income investors to swoop on personal care and beauty products supplier Swallowfield (SWL:AIM) at 335p.

Chief executive Chris How is leaving after five years and will be replaced by Tim Perman on 1 July. He is expected to continue executing on a successful strategy and perhaps inject fresh ideas into furthering the growth of the £56.5m cap’s enviable owned brands portfolio.

Somerset-headquartered Swallowfield is a long-established market leader in the development, formulation, and supply of personal care and beauty products.

Customers include many of the world’s leading brands and it boasts a growing portfolio of acquired and organically developed owned brands. These include The Real Shaving Company, Bagsy and Tru.

First half results (27 Feb) revealed an 18.3% surge in adjusted pre-tax profit to £2.9m. Group sales increased modestly to £40m (2017: £39.7m), driven by 25% growth in owned brands, boosted by a successful festive gifting season and with the acquired Dirty Works, Dr. Salts and SuperFacialist brands proving to be star performers.

Swallowfield’s subdued revenue growth was constrained by a 6% decline in its manufacturing arm which spans plastic aerosols and cosmetic pencils to hot pour products. It traded against some tough comparatives.

These demanding comparatives concealed a positive underlying trend with the division’s other customers. Its plastic aerosol products are about to be extended to a second brand, while Swallowfield’s innovation has helped it bag first orders with a new US global consumer group.

TRIED & TESTED

Perman is experienced in beauty brands and marketing and will join from PZ Cussons (PZC). He looks well-equipped to deliver on Chris How’s tried-and-tested strategy and also inherits men’s haircare brand Fish, a £3m, earnings enhancing acquisition that looks another excellent addition to the portfolio.

Currently sold in Boots, Superdrug, Tesco (TSCO) and Waitrose, Fish is highly complementary to Swallowfield’s other male grooming brands.

In 2017, Fish generated £1.7m revenue and £400,000 of EBITDA, equivalent to an EBITDA margin of 23%.

Stockbroker N+1 Singer believes that ‘under Swallowfield’s ownership, Fish has the potential to be a circa £5m brand with circa 25% EBITDA margins’, reflecting the opportunity to expand with new and existing retailer customers.

For the current year to June, N+1 Singer forecasts £5.2m adjusted pre-tax profit (2017: £3.6m) ahead of £6.1m for the 2019 financial year.

A 6.2p dividend is on the cards this year ahead of 7.1p next, and the payout is comfortably covered by estimated earnings of 24p and 28.7p respectively. (JC)

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