Investment Analysis and Portfolio Management: Blackmores Report

This report presents a comprehensive investment analysis of Blackmores Limited (BKL.AX), a company in the Consumer Defensive sector. The analysis includes a detailed business description, industry overview, and competitive positioning. The report evaluates the company's financial performance over a five-year period, examining profitability, liquidity, efficiency, and gearing ratios, and comparing them to industry benchmarks. It also incorporates macroeconomic and industry analysis, including SWOT and Porter's Five Forces analyses. Equity valuation is performed using the Dividend Discount Model (DDM), Free Cash Flow to Equity (FCFE), and relative valuation models, leading to a BUY recommendation with a target price of $139.03 based on the underpriced share value. Investment risks are also considered, encompassing business, operational, and market risks. The report concludes that investors can increase their exposure to Blackmores Limited for higher long-term returns.

Running head: INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
Company name: Blackmores Limited
Exchange: ASX
Ticker symbol: BKL.AX
Sector: Consumer Defensive
Industry: Household & Personal Products
Recommendation (buy/sell/hold): Buy
Current price (as of 01-05-2019): 92.580
Target price: 139.03
Investment Analysis and Portfolio Management
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
Executive Summary and Final Recommendation:
The analysis of the financial report mainly indicates that the financial performance of
Blackmores Limited is improving but the share value is still underpriced. Hence, investors can
use the opportunity to increase their exposure in Blackmores Limited and generate higher returns
in the long run. The financial models such as dividend discount model, FCFE approach and
relative valuation model has indicated that share price of Blackmores Limited is underpriced.
Hence, a BUY call is initiated for Blackmores Limited.

2INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
Table of Contents
1. Business description, history and financial performance:...........................................................4
1.1 Introduction to the company:.....................................................................................................4
1.2 Overview about the company:...................................................................................................4
1.3 Corporate strategy:.....................................................................................................................5
2. Industry comparison and projections:..........................................................................................5
2.1 Identifying the competitors of the organisation:........................................................................5
2.2 Explaining about the company market share and performance over 5 years:...........................6
2.3 Explaining, discussing and analysing the important ratios of the organisation for the last 5
years, while comparing it with the industry:...................................................................................7
2.3.1 Five year financial performance of Blackmores Limited:......................................................7
2.3.1.1 Profitability:.........................................................................................................................8
2.3.1.2 Liquidity ratio:...................................................................................................................10
2.3.1.3 Efficiency ratio:.................................................................................................................11
2.3.1.4 Gearing ratio:.....................................................................................................................12
2.3.1.5 Stock market ratio:.............................................................................................................13
2.3.2 Comparing the financial performance of Blackmores Limited with Industry:.....................14
2.4 Explaining the DuPont analysis 3-step and 5-step for ROE:...................................................16
3. Industry trends/economic environment:....................................................................................19
3.1 Overall Microeconomic environment:.....................................................................................19
3.1.2 SWOT Analysis:...................................................................................................................19
3.2 Overall Macroeconomic environment:....................................................................................20
3.2.1 Porter’s 5 force analysis:......................................................................................................20

3INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
4. Investment Summary:................................................................................................................21
5. Equity Valuation:.......................................................................................................................22
5.1 Dividend Discount Model (DDM):.........................................................................................22
5.2 Free Cash Flow to Equity (FCFE):..........................................................................................23
5.3 Comparing the intrinsic value:.................................................................................................24
5.4 Relative Valuation Models (RVM):........................................................................................25
6. Investment Risks:.......................................................................................................................26
6.1 Business and Operation risks:..................................................................................................26
6.2 Market risks:............................................................................................................................27
References and Bibliography:........................................................................................................27
Appendices:...................................................................................................................................33

4INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
1. Business description, history and financial performance:
1.1 Introduction to the company:
Blackmores Limited is one of the major developed of customer products for consumers in
Australia, where the organization has been selling their products for the past 89 years. The
company was started in Warriewood, Australia during 1930s, after incorporation the company
increases consumers demanded its operations in the country, which has allowed the management
to acquire new drugs thaw. Moreover, the company has been trying to improve its net profit
generation capability levels to former glory, which was achieved during 2016
(Blackmores.com.au 2019).
1.2 Overview about the company:
There is key Attributes of Blackmores Limited, which has allowed the organization to
improve with performance over the years. Moreover, the company has been conducting
extensive research and development to attain more customized products for the customers.
Blackmores Limited has been committed to deliver natural healthcare products and services to
the consumers, where the highest quality standards are met. In addition, the management taken
precautions to meet the deserving expectations of the customers, which allowed the organization
to enjoy the award of Australia’s Most Trusted Brand for vitamins and supplements for the tenth
year running in 2018 (Blackmores.com.au 2019).

5INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
1.3 Corporate strategy:
Blackmores Limited has a specific corporate strategy, which aims to improve its
operational conditions and reduce any kind of excessive expenses in the long run. Management
of Blackmores Limited thrives to increase their research and development expenses to acquire
new methods in preparing product for the customers. The second corporate strategy that has been
implemented by the management is the online selling platform, which is allowing organization to
improve its revenue generation capability and increasing customer reach. The strategy has been
considered a fruitful endeavor, which has allowed the organization to increase its revenue
generation capability (Blackmores.com.au 2019).
2. Industry comparison and projections:
2.1 Identifying the competitors of the organisation:
The biggest competitors of Blackmores Limited are Integria Health care, Mede Linked
and Health Line, as these companies specify in a particular drug, which is also provided by
Blackmores Limited. The competitiveness in the Australian Household & Personal Products is
relevantly high, where organisation without specific knowledge about the current competiveness
cannot make relevant investments decision to increase its market share. The competitiveness of
Blackmores Limited is minimal in the Household & Personal Products market, where companies
like are Integria Health care, Mede Linked and Health Line are also increasing their
competitiveness in the market to capture more market share (Vogel 2014).

6INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
2.2 Explaining about the company market share and performance over 5 years:
Figure 1: Share price trend of Blackmores Limited for the past 5 years
(Source: Au.finance.yahoo.com 2019)
The above figure provides information about the share price trend of Blackmores Limited
for the past 5 years, which helps in estimating the share price performance of the organization.
Share price performance of the organization has relatively improved over the 5-year period
where in 2016 the five-year high was touched. The company met a high of $220.90 in 2016,
while after that it started to decline to the levels of $80.45 in 2019. Moreover, during the period
of 2017 to 2019 the share price performance of Blackmores Limited was consolidating, which is
a positive indication in the technical analysis. This directly indicates that there is future growth
available in the share, which could allow the investors to increase its return from investment.
However, the five-year low of Blackmores Limited was at the levels of 26.35 while the high was
at the levels of 220.90, which indicate that more than 100% increment in share price was

7INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
witnessed. This was only possible due to the high growth rate that has been achieved by the
organization over the period of 5 years (Blackmores.com.au 2019).
2.3 Explaining, discussing and analysing the important ratios of the organisation for the
last 5 years, while comparing it with the industry:
2.3.1 Five year financial performance of Blackmores Limited:
Profitability 2018 2017 2016 2015 2014
Net margin 11.63% 10.68% 16.68% 11.96% 7.31%
Gross margin 61.39% 57.03% 64.26% 62.04% 68.17%
Return on assets 15.06% 14.32% 22.56% 15.87% 10.75%
Return on equity 36.30% 33.24% 56.10% 35.03% 24.40%
Liquidity ratio 2018 2017 2016 2015 2014
Current ratio 1.7
3
1.8
1
1.5
3
1.63 2.26
Quick ratio 1.14 1.22 0.93 1.30 1.60
working capital 128,040.00 116,106.00 102,345.00 72,846.0
0
73,336.0
0
Efficiency ratio 2018 2017 2016 2015 2014
Asset receivable
turnover
4.25 4.14 4.96 4.38 4.93
Asset turnover ratio 1.37 1.29 1.63 1.47 1.47

8INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
Inventory turnover ratio 2.46 2.36 2.76 3.82 2.86
Gearing ratio 2018 2017 2016 2015 2014
Debt to equity ratio 0.26 0.25 0.10 0.05 0.52
Interest coverage ratio 25.86 20.63 80.23 21.06 8.24
Debt ratio 0.11 0.11 0.04 0.02 0.23
Stock market ratio 2018 2017 2016 2015 2014
Dividend yield 2.14% 2.82% 3.12% 2.70% 4.67%
EPS 4.06 3.43 5.81 2.71 1.49
P/E 35.06 27.97 22.63 27.81 18.23
2.3.1.1 Profitability:
2018 2017 2016 2015 2014
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
Profitability ratio

9INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
Figure 2: Profitability ratio of Blackmores Limited for the past 5 years
(Source: As created by the author)
The above figure provides information about the profitability ratio of Blackmores
Limited over the period of 5 years. From the calculation, it is detected net margin of the
organization has been fluctuating since 2014, where the values have increased to the levels of
7.31% in 2014 to 11.63% in 2018. Moreover, increment in overall net margin was witnessed in
2016 where it again declined in 2017, which directly indicates that the overall performance of
Blackmores Limited is fluctuating over the period of 5 years. In the similar instance, gross profit
margin of the organization has been fluctuating due to the increment in revenues and decline
over the period of 5 years. The major contributor to the net margin and gross profit margin of
Blackmores Limited is the revenue that has been generated by the company during the fiscal
years. Likewise, it has been witnessed that return on Assets and return on equity of Blackmores
Limited has been fluctuating over the period of 5 years. Nevertheless, from 2017 to 2018 an
increment in the values Blackmores Limited is detected, which is due to the increment in net
profits of the organization. Kou, Peng and Wang (2014) mentioned that with the help of
profitability ratios investor can gauge into the financial income of the organization and determine
that the investment are being conducted appropriately to generate higher revenues from
operations.

10INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
2.3.1.2 Liquidity ratio:
2018 2017 2016 2015 2014
-
20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
120,000.00
140,000.00
Liquidity ratio
Figure 3: Liquidity ratio of Blackmores Limited for the past 5 years
(Source: As created by the author)
Liquidity ratio of Blackmores Limited has been evaluated in the above figure, which
indicates about the relevant decline in its overall financial conditions. The current ratio of
Blackmores Limited has declined from the levels of 2.26 in 2014 to 1.73 in 2018. Moreover, the
quick ratio of the organization also decreased during the period where the value has changed
from 1.60 in 2014 to 1.14 in 2018. This directly indicates that the financial condition of
Blackmores Limited is declining, due to the inappropriate inventory management system, where
the organization is maintaining high inventory. The working capital of the organization is
relatively increasing over the period, which is mainly needed to support the growing operations
of the organization. The current financial performance of the organization has declined, as it
would not appropriately able to supports its financial obligations This would directly have
negative impact on the operations of the organization (Altman et al. 2017).

11INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
2.3.1.3 Efficiency ratio:
2018 2017 2016 2015 2014
-
1.00
2.00
3.00
4.00
5.00
6.00
Efficiency ratio
Figure 4: Efficiency ratio of Blackmores Limited for the past 5 years
(Source: As created by the author)
Information about the efficiency ratio is directly depicted in the above figure, which
states that the efficiency condition of the organization has a relatively deteriorated over the
period of 5 years. However, no improvements are seen in any of the ratios. Moreover, the
receivables ratio has deteriorated, as more time is being used by the organization in acquiring the
cash from their credit sales. The declined in the current inventory ratio levels has increased the
minimum blockage time of the inventory in storage. Ehiedu (2014) indicted that with the help of
efficiency ratio, investors are able to detect the productivity of the management and determine
how available resources is being utilized by the organization.