McPherson Ltd Financial Report: Analysis, Valuation & Strategies

This report provides a financial analysis and valuation of McPherson Ltd (MCP), an Australian Stock Exchange-listed company involved in the marketing and distribution of health and beauty products. The analysis focuses on a 'base case' scenario, examining the company's business strategies, sales revenue based on estimated models, and recent market communications. Key strategies include focusing on core brand performance and increasing global revenue. The report assesses the company's financial health, noting its undervalued share price compared to estimated value, along with concerns about debt and acquisitions. It also considers the impact of new directors and shareholder interest changes. The analysis includes forecasted balance sheets and profit and loss statements, concluding that McPherson's Limited is well-positioned for future growth despite current financial questions. The company will manage to recover and reduce its debt to equity ratio in 2021.

Introduction
McPherson Ltd Company is a dynamic consumer product involved primarily in the marketing,
distributing and doing business in a variety of health and beauty products throughout the Asia
Pacific, UK/Europe and North America. The expertise of the company lies in managing various
complex and a wide range of products and services that the consumers use in everyday lives.
The company has a diversified portfolio in the overall products and services it caters. Products
including kitchen households, skincare, hair care, and several accessories are some of the key
product portfolios of the company. The company is listed in the Australian Stock Exchange
with the ticker symbol “MCP” with a market cap of around 117.76 million and its current share
price to be around $1.13. The operations of the company are distributed globally in Australia,
New Zealand, South East Asia and the United Kingdom. The major competitors of the
company include Pental Ltd, L’Oreal Australia Pty Ltd, Unilever Australia Holdings Ltd, and
Asaleo Care Ltd (McPherson’s Limited, 2018). The financial report provides three valuations
scenarios of the company; base case, plausible (moderate to severe), and finally rise in global
temperatures of at least 2 degrees Celsius above pre-industrial levels.
First Valuation Scenario “Base Case”:
Business Strategies
McPherson Company has always had a wide range and variety of products and services in the
product portfolio of the company that has helped them garner better market share in Australia
and the rest of the world. The company has always tried to improve the focus on the core six
owned brand performance so that the growth of the company can be sustainable (IBISWorld,
2018). The increasing know how and the acceptance of the various products and services of
the company has led the company to increase both the domestic and the global revenue for the
company (IBISWorld, 2018). The company has always strategised to increase the revenue base
of the company both in the domestic and on a global basis. The same can be well seen where
the McPherson Company’s management has focused on increasing the global revenue of the
company as the acceptance, and the brand value should be diversified. In brief, below table
summarises the current MCP’s strategies as follows.

Sales & Revenue Based on the Estimated Revenue Model:

Based on the above-forecasted model, in the year 2019, the company witnessing a growth of
36% in the skincare brand products, pharmacy products and through other export channels
compared to the year 2018. The total sales revenue from continuing operations for the company
will increase by an average of 4.8% annually, where the grocery brand Multix saw a major and
a steady growth rate of about 5.4% over the next five years. The demand and the revenue
growth rate of the health and beauty product division will be significantly contributed to the
overall revenue of the company. The higher profitability margin has led the management of the
company to focus on the growth ideas and expanding (Kallala et al., 2015). The focus of the
company is on high-profit margin products and services thereby bringing operational efficiency
in the business. Through, optimum utilisation of the resources in the form of reduced cost of
sales for the company has been the key reason for constant growth rate in the profitability of
the company (McPherson’s Limited, 2018).
Recent Communications to the market:
In 2018, MCP announced a change of director’s interest notice. It means that the company
hired new two directors (Alison Mew & Jane Mckellar), where they held 12,000 and 15,600
shares, respectively (Moelis & Company, 2016). By looking at their profile, Alison has 30
years of experience in quality, manufacturing, sales and marketing in a highly regulated
environment, operational solutions, and high experience in Pharmaceutical organisations. On
the other hand, Jane deeply involved in consumer-focused business transformation,
technology, marketing, digitalisation, divestments and enhance business performance. Not to
mention, the new incoming managing director (Laurie Mcallister), who has extensive
international experience in consumer goods, general management, R&D, Sales, innovation,
and marketing in Europe, Australia, and Asia. As a result, the new board of directors seems to
be promising and in line with the current company’s strategies toward business growth.
Another major announcement of MCP, issuing a notice of change interest of shareholders’
holding power (Investor Mutual Ltd increase from 10.08% to 11.09%. Which means Mutual
Ltd considered as a substantial shareholder who has full authority to influence the voting and
disposal of shares in the long-term. Finally, the company issued shares as a dividends buyback
(Dividends Reinvestment Plan DRP) with a discounted rate of 2.5% to assist the company to
re-invest and growth opportunities (InvestSmart, 2019).

Assumptions to “Base Case”:

Summary of MCP’s Valuation & Financial Analysis:
(Source: Yahoo Finance, 2019)
After undertaking the above comprehensive researches on MCP’s strategies, most recent
communications to the market, and benchmarking analysis with the industry to see the
compliance range of the company (see appendices), McPherson’s Limited is well-positioned
for future growth. However, looking at the current share price of $1.13 and compare with the
estimated share price of $1.71 (5-year horizon, see appendices), the company is undervalued
after accounting its future growth along with the above assumptions. Besides, the current
financial health of the company raises many questions regarding the ambitious growth,
questionable acquisitions, loss of key customers, and its low price to earnings ratio of 10.94x
compared to current AU market average of 16.33x. Thus, many investors reluctant toward
investing in the company considering the above discussed financial aspects. According to the
forecasted balance sheet (see appendices), the company will raise a debt of $20m on 2019 &
2020 to meet its short-term obligations. Besides, it needs to use the currently available cash to
re-invest in the business along with meeting its short-term obligations. The average estimated
levered beta over the next five years indicate that the company will operate in moderate
business risk. Overall, the company will manage to recover and reduce its debt to equity ratio
in 2021.

Reference:
Yahoo finance. (2019). McPhersons’ Limited (MCP.AX). Retrieved on March 20, 2019, from
https://au.finance.yahoo.com
Moelis & Company. (2016). McPherson’ Ltd (Moelis Australia Securities CAN 122 781
560). Retrieved from https://www.asx.com.au
InvestSmart Financial services Pry Ltd. (2019). McPherson’s limited: Company
announcements. Retrieved on March 20, 2019, from https://www.investsmart.com.au
IBISWorld Company Report. (2018). McPherson’s Limited – Premium company report
Australia (IBISWorld company report). Retrieved from IBISWorld database.
McPherson’s Limited. (2018). 2018 Investors day presentation. Retrieved on March 20,
2019, from https://www.mcphersons.com.au
Kallala, R. F., Vanhegan, I. S., Ibrahim, M. S., Sarmah, S., & Haddad, F. S. (2015). Financial
analysis of revision knee surgery based on NHS tariffs and hospital costs: does it pay to
provide a revision service?. The bone & joint journal, 97(2), 197-201.
Richardson, A. (2018). Good looks: Favorable social, economic and demographic trends
increase industry revenue (IBISWorld Industry Report F3722 Cosmetics and Toiletry
Wholesaling in Australia). Retrieved from IBISWorld database.

Appendices

“Base Model Calculation”
MCP
Drivers 2018 2019 2020 2021 2022 2023 Additional inputs
Revenue growth 6.0% 6.0% 3.0% 4.1% 6.3% Growth from year 5 3.0%
Op cost margin 89.1% 89.0% 86.6% 85.8% 88.2% 85.5% Shares on issue now 105.1
Depreciation
rate 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% Levered beta 1.35
Interest rate 22.2% 22.2% 22.2% 22.2% 22.2% 22.2% Government bond 2.2%
Payout ratio 63.6% 63.6% 63.6% 63.6% 63.6% 63.6% Risk premium 6.0%
CA/revenue 37.4% 37.4% 37.4% 37.4% 37.4% 37.4%
CL/revenue 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
Market value of
equity 180
Revenue/net
NCA 2.74 2.74 2.74 2.74 2.74 2.74 Share price 1.71
Other
liabs/assets 6.4% 6.4% 6.4% 6.4% 6.4% 6.4%
Tax rate 35.3% 30.0% 30.0% 30.0% 30.0% 30.0% Terminal value 222
P/E ratio 16.4
Debt/equity 20.0% 21.0% 20.2% 15.4% 13.7% 12.5%
Balance Sheet 2018 2019 2020 2021 2022 2023
Current assets 79 84 89 91 95 101
Gross non-current assets 113 120 127 132 138 146
Less acc depreciation 36 38 40 43 45 48
Net non-current assets 77 82 87 89 93 99
Total assets 156 165 175 181 188 200
Current liabs (ex debt) 38 40 43 44 46 49
Debt 18 20 20 17 16 15
Other liabilities 10 11 11 12 12 13
Total liabilities 66 71 74 72 73 77
Equity 90 95 101 108 114 123
Profit and Loss Statement 2018 2019 2020 2021 2022 2023
Revenue 211 224 237 244 254 270
Operating costs 188 199 205 209 224 231
EBITDA 23 25 32 35 30 39
Depreciation, amortisation 2 2 2 2 2 3
EBIT 21 23 30 32 28 37
Interest costs 4 4 5 4 3 3
NPBT 17 18 25 29 24 33
Taxes 6 5 7 9 7 10
NPAT 11 13 17 20 17 23
Dividends 7 8 11 13 11 15
Retained earnings 4 5 6 7 6 8
Free Cash Flow 2019 2020 2021 2022 2023

EBIT (1 - tax rate) 16 21 23 19 26
Depreciation, amortisation 2 2 2 2 3
Change in working capital -2 -2 -1 -1 -2
Capital expenditures -7 -7 -5 -6 -8
Free cash flow for investors FCFF 9 14 19 14 18
Interest (1- tax rate) -3 -3 -3 -2 -2
Change in debt 2 1 -4 -1 0
Free cash flow for owners FCFE 8 11 13 11 15
Levered beta 1.35 1.34 1.30 1.29 1.28
Unlevered beta 1.18 1.18 1.18 1.18 1.18
Debt/equity 0.21 0.20 0.15 0.14 0.12
Equity hurdle rate 10.30% 10.26% 10.02% 9.94% 9.88%
Cash flow plus terminal value 8 11 13 11 237
Present value 7 9 10 7 147