Gamble of the week: An alluring cosmetics maker
Paul Hill Sep 03, 2012
Peter Gyllenhammar is a prolific investor who has made a fortune backing small caps offering substantial upside. He owns 29.5% of Swallowfield, while another activist investor, Western Selection, has a 16.5% stake. Other investors should take note.
Gyllenhammar and Western Selection’s interest in Swallowfield stems from the company being in the right place at the right time. The firm is a contract manufacturer for the personal products industry, making hundreds of different kinds of cosmetics and toiletries. These include deodorants, shampoos, lipsticks and moisturisers for specialist retailers (50% of sales) such as Boots, and for general brands (50%) such as PZ Cussons.
The firm’s competitive advantage is centred on its product innovation, expanding geographical footprint, and low-cost production base in Britain and the Czech Republic. Its everyday products are not immune to a recession, but I suspect that as austerity measures bite more households will look for better value items of the kind made by Swallowfield.
So how is the business performing? At the interims in March CEO Ian Mackinnon said that he was expecting a stronger second half in light of “a number of new client wins and future product launches”. Raw material cost increases crimped margins in the first half of the year, but these are now subsiding.
Swallowfield plc (Aim: SWL)
For the year ending June 2012, house broker Singer predicts turnover and underlying earnings per share of £59.8m and 10.8p respectively, on top of a 6.3p dividend. The stock trades on a price-to-earnings ratio of 9.5 while paying a 6% yield, which is 1.7 times covered and underpinned by net tangible assets of 115p per share.
I’d rate the group on a ten-times earnings before interest, tax and amortisation (EBITA) multiple. Assuming that a sustainable profit margin of 5% is achieved by 2014 (compared to 2.4% today), then discounting back at 12% and adjusting for net debt of £3.9m and a £2.3m pension deficit, I get an intrinsic worth of 155p per share.
One risk is that the firm is a relatively small player in a global industry. If conditions get harsher, it may have to deal with greater margin pressure and longer payment terms from its bigger customers. The results of the pension fund’s triennial valuation should be released shortly and may not make great reading. Note also that on occasions liquidity in a stock this size can be poor. Nonetheless, at current levels Swallowfield looks a sound bet for the thicker-skinned investor.
Preliminary results are scheduled for early September.
Rating: SPECULATIVE BUY at 101p (market cap £12m)
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