Trilogy gets a Proposal
Niche cosmetics player Trilogy (NZX:TIL, ASX:TIL) recently received a takeover proposal from Chinese private equity giant CITIC Capital. That aside, the company also recently reported interim numbers highlighting the potential in the overseas business.
Recap
Back in November (FAT-AUS-848) 2017 we covered Trilogy International’s recent acquisitions as well as their Annual General meeting where they shed light on their plans for the first half of 2018 (1H18). In addition to that, we briefly discussed the company’s efforts to expand to China, which is one of the faster growing large markets for cosmetics.
Since then, there have been a couple of key developments for Trilogy, which caused the share price to seesaw before settling at NZ$2.82, marking a gain of 17% since our last coverage in November. First was the company’s 1H18 report which, while we believed to be a decent performance, left the market underwhelmed and caused the shares to tumble circa 14%. However, following that, in Mid-December, Trilogy received an offer to be acquired, leading the shares to rally over 25%.
Today, the key focus of this note will be to provide an update on the acquisition proposal as well as provide some colour on the company’s 1H18 trading performance.
What’s New?
Back in Mid-December, CITIC Capital, one of China’s leading alternative asset managers, proposed to Trilogy International that they intend to acquire all the latter’s shares at circa NZ$2.90, valuing the takeover offer at NZ$210.97 million. That marked an EV/EBITDA multiple of 13.6x based on the 12 months to 30 September 2017 result.
Image Credit: Fat Prophets, Company Websites
So far, management and the board seem to be supportive of the scheme with the Chairman, Mr Grant Baker, noting that “the Board remains confident that TIL is well positioned to deliver growth in earnings across each of its four businesses in the long term. Delivering this growth will take time and involves execution risks. Therefore, shareholders may find attractive the opportunity to realise the value of their TIL shares in cash now.”
Following that, Ms Angela Buglass, the CEO, also noted that “CITIC Capital will bring added capability necessary to build our brands on a truly global scale, better serve our customers and consumers, and provide new career opportunities for our people.” While Mr Baker further chimed in that this will push the company towards its next phase of growth globally and allow the company to expand more rapidly.
We agree with that view that given the extensive reach, influence (especially in China) and resources CITIC Capital offers, this would lead to growth for the company and is a prudent decision on the side of management. But the question as to how Members should respond to this move still stands.
We recommend a wait-and-see approach.
The Trilogy Board has appointed of boutique investment bank, Grant Samuel, to prepare an independent adviser’s report to assess the merits of the offer and noted that they will only accept the terms if the offer price per share is within or above the valuation range and no superior proposal arises. Trilogy also has strong investment appeal as an independent company.
1H18 Results – Currency in NZ$ unless noted otherwise
Next is the company’s interim results. Group level revenues hit NZ$46.66 million for the 6-month period to 30 September 2017, up a modest 4% year-on-year, with their recent Lanocorp acquisition as well as their overseas business delivering most of the growth, which surged 235% year-on-year. This was more than enough to offset softer trading conditions in the domestic market.
Other segments also reported a decent performance, as Trilogy’s Skincare business maintained their strong market share in the New Zealand (#1) and Australian (#2) pharmacy markets. This was despite challenging conditions in the retail sector and the company cited 4.8% year-on-year growth in revenues to $18.7 million.
Their ECOYA segment reported $8.3 million revenue which was lower compared to last year’s $9 million, though international markets reported growth in the 1H. According to management, driving lower revenues and profits this time around were constraints in glass and wax supply.
Going forward, however, we believe that the successful brand relaunch in September 2017 will create momentum and that the 2H18 will deliver a better performance as the company expands their reach into new markets.
Their CS Company subsidiary, which distributes beauty products in New Zealand, reported revenues of $23.94 million which was relatively flat (-25 basis points) on a year-on-year basis, mainly due to lower trading activity in New Zealand whilst changes in their supplier agency agreement mix led to fluctuations in pricing.
Source: Trilogy (NZX:TIL, ASX:TIL) 1H18 Filing
Moving on to the bottom line, the company reported EBITDA of $6.3 million, down by 12.5% year-on-year. According to management, softer domestic demand and supplier shortages (for ECOYA) aside, the increased price in rosehip oil and increased spending for expansion led to margin compression as seen in the table above. In addition, the CS Company business was also impacted by unfavourable currency conversion as the NZ$ fell against the AU$ over the period.
Nevertheless, NPAT improved substantially (+17%) year-on-year to NZ$4.1 million as the company had lower debt (-22.4% yoy) and tax costs (-8.4%). The finalisation of the CS Company earnout also helped add to the bottom line.
Going forward, management notes that they expect a better performance in the 2H18 as the US and UK markets are expected to provide a much larger take given the crucial Holiday trading. The expansion into these markets are expected to open “1,000 additional doors”. Given that, management reiterated their revenue and EBITDA targets of a 10% year-on-year growth for the current fiscal year.
Turning to the charts, on the daily, prices are within reach of the top band of a broad consolidation (support at $2.04 and resistance of $2.86) which has been in play since August 2017. Therefore, in order for the short-term technical outlook to strengthen, a sustained clearance of the $2.86 level as marked by the horizontal solid-red line is required. If this was to occur, then the next resistance level is indicated at the 38.2% Fibonacci retracement of $3.17. However, it should be noted that the RSI (relative strengthen index) is beginning to weaken from overbought territory. This is a sign of exhaustion in short-term upward momentum, which is not to be unexpected, considering the substantial gain in share price evident since mid-December 2017 when prices were trading at the $2.27 vicinity.
With reference to the monthly chart, support was eventually respected at the 61.8% Fibonacci retracement of $2.14 in September 2017 which is a positive event. In order for the long-term uptrend to resume its course north, a sustained break above overhead resistance evident at the August high 2017 of $2.86 as marked by the horizontal red line is required. Should this occur, then this would bolster upward momentum and thus translate to further gains to be had over the broader horizon.
Summary
Trilogy (NZX:TIL, ASX:TIL) is headed towards interesting times as they received a takeover proposal from China’s CITIC Capital. Trilogy also reported decent interim numbers in our view despite softer demand from the domestic market. The Lanocorp acquisition proved to be accretive while their efforts to expand overseas have also born fruit given the massive 235% growth, albeit a small base. Nevertheless, going forward, the international business is expected to be the driver of the company’s growth.
On a valuation front, the shares now trade on a forecast FY18 PE of 13.5 times and offer a dividend yield of 2.4 percent. This doesn’t appear to be a very demanding valuation given the company’s growth prospects.
Consequently, Trilogy (NZX:TIL, ASX:TIL) will remain held in the Fat Prophets Portfolio.
Disclosure: Interests associated with Fat Prophets declare a holding in Trilogy (NZX:TIL, ASX:TIL).
