My intrinsic valuation of BKL is $35.70 per share (using a free cash flow model).
BKL is a profitable, low-risk business that has consistently grown its revenues over the long-term. The stock has fallen from a high of over $36.00 in 2013, to a low of around $20.00. The fall was due to a reduction in operating margins and earnings caused by a combination of pressure from customers and higher costs due to a falling AUD. There was also an inventory write-off as BKL ceased producing several poorly performing product lines.
BKL has responded to these challenges by acquiring Bioceuticals – a range of healthcare products distributed exclusively by natural health care professionals (higher margin, lower bargaining power of customers) and continuing to build its Asian business (higher margin, faster revenue growth).
The growth of the Asian business also helps to create a natural hedge for BKL as the revenues of the Asian business are denominated in the same currency as BKL’s primary production inputs. In other words, as the Asian business growth, the risk to margins from currency fluctuations decreases.
Recent results indicate that the deterioration in margins has stabilized and the stock price has recovered some of its lost ground.
DISCLOSURE: I currently own shares in BKL (weighted-average purchase price = $27.34).
The risks to BKL are:
- Lower margins due to continued pressure by customers (Coles, Woolworths and Chemist Warehouse) to reduce prices.
- Increased competition from Suisse and Nature’s Way.
- Threat of substitution – BKL products are better quality and trade at a premium to competitor products.
- Higher costs and falling margins due to a lower AUD.
- Poor growth in its Asian operations.
- Liquidity. BKL has a market capitalization of $570.12m however its free float is very small – $12.17m. Trading volume is very thin, meaning that the price can routinely shift by several percent due to a large trade.
As of the 5th of November 2014, BKL shares were trading at $33.00, representing a:
- 7.53% discount to intrinsic value.
- Trailing 12-month dividend yield of 3.97% (payout ratio ≈ 85%).
Why value BKL? BKL is an interesting company with the following attributes:
- Trading at a discount to my conservative estimate of intrinsic value.
- Consistent history of revenue growth.
- Highly profitable – return on capital over 3× cost of capital.
- Low debt.
- Sustainable yield.
Why might this be an opportunity? Because BKL is a high quality company that’s too small for most institutional investors to own.
While no longer a bargain, BKL is a highly-profitable business, despite its margins having decreased in recent years.
Over the last few years the market has focused primarily on the deterioration in the margins of the Australian business (due to pressure from customers to drop prices). There are early signs that the deterioration in margins may have stabilized.
There is also the potential for overall margins to improve as the higher-margin Asian and Bioceutical businesses become a bigger share of the company’s revenues over time. For example, Asian revenues are growing at around 9% per annum. If they continue growing at this rate, BKL’s Asian business will double its revenues in approximately 8 years.