L'Occitane International (973 HK ) - Cream of the crop
L'Occitane was established in 1976 as a soap maker in the South of France. In 1990 the company was bought by a venture capital firm and from 1994 Reinold Geiger began buying into the company, took over management and began expanding. Today, L'Occitane's offerings include skin and body care, men's grooming aides, and home fragrances. Its products are sold globally.
The initial public offering of L'Occitane International took place in 2010. L'Occitane Group remains the major shareholder (72.7%) and owns other non-related assets such as a hotel close to the company's lavender farm and a salmon farm (also in France). L'Occitane Group is mainly owned by (now Executive Chairman) Reinold Geiger and his family (~74%), CEO Andrew Hoffmann (~20%), and other executive directors. There are plans for management (L'Occitane Group) to place large blocks of L'Occitane International shares to improve the free float of the company.
Following the success of the core brand (now called L'Occitane en Provence), the firm has grown organically through new brands (L'Occitane Brazil and Melvita) and has made several acquisitions including Limelife, Elemis, Sol de Janeiro and most recently Australian high-end brand, Alchemist. Acquisition targets are generally large (>$100 million in revenues), use natural ingredients, boast quality formulas, and have authentic brand stories.
Distribution is split equally between own stores, wholesale and online. Online is more profitable than offline, and business has generally been shifting towards online partly due to the pandemic and partly due to the new brands.
The global beauty market
L'oreal estimates that the global beauty market grew 6% in 2022 and grew on average at 5% in US dollar terms prior to Covid-19. Post 2018, the dermocosmetics market (skincare) has grown at a faster pace. Hygiene products (soap) has been growing at a slower pace but is becoming a smaller part of this business. Looking ahead, estimates for global beauty market growth is ~5.5% per annum long term.
Financial considerations
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The company's own expectations are for single-mid-digit revenue growth for the established L'Occitaine en Provence brand (67% of FY23 sales), and at considerably higher rates for the brands they are rolling out globally.
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L'Occitaine is vertically integrated with long-term contracts in place for ingredients. The business is exposed to packaging and freight costs, however. Typically, price increases have been 1% to 2%, but this has recently been higher to mitigate inflationary pressure.
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The operating profit margin is expected to come in at 14.5% in FY23 (sales results have been released but not earnings numbers yet). This is expected to expand to over 16% by FY26.
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Leverage is low - management aims to retain flexibility to take advantage of opportunities as and when they come up.
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The dividend payout ratio was 40% in FY22 and the plan is to bring this closer to 50% over time.
Investment case summary
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L'Occitaine is a fast-growing high-margin premium beauty products company, exposed to the reopening of the Chinese economy and continued recovery in international travel. The company is also recovering from the loss of its Russian business (~4% of sales previously).
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The roll out of new brands to other geographies provides a sustainable footing for growth going forward.
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Growth and margins look slightly underestimated on a consensus basis. There is also potential to see margins increase, with the shift to more on-line sales and additional investment in new brands for the next two years.
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The company has modest debt levels and is highly cash generative allowing it to invest in its own portfolio and make sizeable acquisitions to complement its organic growth profile.
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The share looks attractively priced on both an absolute basis and relative to peers.
Risks
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The company operates globally and reports results in euros - there is a risk of currency devaluation elsewhere impacting reported results.
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Brand controversies in luxury and beauty has been an issue for some competitors in the past and is likely a possible threat for this company as well.
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The free-float is low - new stock in the market could result in short-term pressure. The possibility of share buy-backs are low because of the low free float as well.
Consensus and Valuation
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Consensus is positive on the stock, with 100% of sell-side analysts maintaining a "Buy" recommendation.
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Consensus forecasts EPS growth of -8.5%% y/y for the year ending 31 March 2023, and 25.9% growth for next year.
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L'Occitaine International is trading on a forward PE of 12.7 times, a 57% discount to the peer group. The stock is also trading at a substantial discount relative to history (five-year average forward PE: 19.2 times).
