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B&S Group BSGR
October 18, 2020 - 2:55am EST by
Hvitserk
2020 2021
Price: 6.42 EPS 0.4 0.6
Shares Out. (in M): 82 P/E 16 10.7
Market Cap (in $M): 529 P/FCF 16 10.7
Net Debt (in $M): 240 EBIT 64 91
TEV (in $M): 769 TEV/EBIT 12 8.5

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Description

B&S group is a distributor of health&beauty and liquor products. They are growing earnings high single digit but trades at 8-9x P/E or CF (normalized for covid), a significant discount to peers at 15-20x. Investors are worried because B&S has exposure to travel retail and cruise (7% and 2.5% of revenue, respectively) and debt appears high - however, these concerns are overblown and we think this creates a compelling entry point.
 
- B&S is a distributor. It supplies mainly health and beauty products and liquors (but also food, beverages, electronics and pharma/medical) to
o Value-for-money retailers, secondary channel retailers, retailers in underserved markets and e-commerce platforms (incl. fulfilment services) - approx. 69% of revenue
o Maritime sector – ships and cruise - approx. 7% of revenue
o Remote channels - gvt./defense operations or remote industrial sites - approx. 10% of revenue
o Travel retail customers - approx. 7% of revenue
o Other smaller businesses - 7%
 
- Business based on relationships with brands, ability to source out of range/stock-lots/close out products/excess inventory/non-standard product sizes and long tail of product, serves hard to serve niches
 
-Why would a customers choose B&S?
o Simplicity (outsource some of supply chain), cost/efficiency/scale (biggest operator and has invested a lot of money in IT and warehouses over past years), compliance, access to products and suppliers retailers won’t otherwise have access to – single source solution, bonded status with no taxes etc. if shipped international, automated warehouses
 
Thesis
- High single digit earnings growth at 9x P/E, EUR 0.7 EPS normalized for covid-19 lockdown. 7.5x P/E if adjusting for other “one-offs”. Could get to EUR 1.1 EPS within 5yrs. Comps trade in high teens or 20x P/E.
o Mid single digit organic revenue growth given exposure to growing end markets (E-commerce, value retail, fragrancenet etc.) – grew 10% in 2018 and 4.9% in 2019
o Margin at 4.4% 2019 EBIT depressed because of one-offs; adjusted for certain temporary effects, margin was 5.5%. Adjustments:
▪ 1) Asia low profitability of 0% gross margin given Hong Kong protests and trade wars impacting demand – should be say 10% so that’s 15m extra gross
profit, so 0.5%+ on group margin
▪ 2) Delay of warehouse where they had to hire a lot of people in B&S segment in 2019 – could be another 7.5m so 0.4%
▪ Normalized margin is 5.5%. Also seems reasonable top down. Normal margin 6-7% for peer companies. Earnings should therefore grow more than revenue
 
- Growth of underlying markets – growth approx. 5%
o Company exposed to e-commerce (25% of revenue), high growth value retailers (11%) – both categories growing double digit
o Travel retail (7% of revenue) used to grow c. 5% per year
o Other segments low to mid single digit
 
- Mgmt and MDs of divisions very aligned given ownership and have created value over time
 
- Bolt-on acquisitions likely to provide additional upside – good acquisition track record
o Model is to buy companies at 6-8x EBITDA pre synergies, don’t believe in turnaround
companies, mgmt stays on board and retain stake
 
- Competitive strenghts of business:
o Relationships with brands, ability to source excess inventory etc. from A brands
o Bonded supplier status – can ship things in and out in Netherlands without paying taxes and duties
o Difficult to supply to the customers they do, e.g. within B&S
o Economies of scale in niches
o Seems well invested in terms of logistics/IT systems, incl. automated warehouse 
 
Why is it trading where it does?
- Investors worried that covid impacts the business significantly
 o A full lockdown does impact the business (discount retailers shut stores etc.) but partial lockdown where retail shops and restaurants are open is not that bad for the company. Only 10% of revenue needs a “covid-free” environment – namely cruise and travel retail shops in airports
o Certain segments benefit from Covid – online, FragranceNet, medical supply
 
 
- Company seen as levered – Gross debt (incl. leases) 418m, cash of 51m so net debt incl. leases of 367m at FY19 on 115m EBITDA, i.e. 3.2x
o However, debt ex leases of 296m is 80% secured facilities against inventory at very low interest rates. Company paying many suppliers in cash instead of having
payables. If company financed themselves with payables, investors wouldn’t include this in EV-equity bridge. Company has 25% WC as % of sales vs. 12.5% for comps; or 5.5% of sales in payables vs. 13% for comps
o People might be worried that they have a liquidity issue – however, inventory can be scaled up or down quickly + they have positive cash flows this year
 
- Low market cap with a couple of analysts covering the stock – however, not really covering, just summarizing results
o Analysts say they don’t get a lot of incoming on this stock (sounds like nobody calls them about it)
 
- Broken IPO story – promises of 7-8% organic growth, 5% acquisitions + strong margin has not worked – the company would say because of “one-offs”; IPOed at 14.50 in March 2018 and stock is now at 6.5
o Mgmt partly right about one-offs + Mgmt very focused on long term value and is investing in growth through Opex (e.g. new automated warehouse) – however, this causes margin to decline
 
Risks:
- Covid 19 impact – lasting a lot longer than expected
o Will have a big impact on 10% of revenue - Cruise (2.5% of revenue), B2B travel retail (1%), Travel retail shops (7%)
o Further areas could be at risk in more severe lockdowns, e.g. Liquors in Europe (11%)
o However, some of B&S businesses actually benefit from lockdown
 
- Disintermediation/Amazon
o Difficult in many of their segments to disintermediate because company is specializing in out of range products, long tail of products, difficult to serve markets. Amazon is a customer of B&S.
▪ Amazon will try to source directly the top 100 selling brands but don’t want to source out of range fragrance that is old but still has a customer base – they can buy those in a bundle from B&S
 
- Low margin business – small difference (e.g. in Asia liquor) can wipe significant profitability
 
- Governance – company majority own by founder – no red flags but warehouses owned by ex-CEO/chairman, not an independent board
 
 
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

-          Covid-19 improving – will improve sentiment to stock (and fundamentals in certain segments)

-          Prove that they can do 5%+ organic growth for a couple of years and 5%+ EBIT margin with additional upside from bolt-on

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