Description

Fair warning, this is a PA idea at best, £80mm market cap trades about £100k/day. Tl;dr: microcap personal goods compounder at a reasonable multiple, run by a team with a 20 year record. No particular catalyst

Creightons PLC is a UK manufacturer of health & beauty / personal care products. It’s a microcap, closely held and thinly traded, mostly operates in unglamorous business (private label/contract manufacturing), has no analyst coverage and is currently trading close to all-time highs. Oh, and they benefited by selling hand sanitizer last year, a business they have since discontinued. 

So what’s to like? I contend that this is a good business at a reasonable price, run by management team with significant ownership that know their niche. They’re nimble, focused on Return on Capital, have been executing their gameplan for the last 20 years and particularly well the last 5. They just achieved the goals they set in 2017 and have set more ambitious goals for FY 2024 which could lead to a double in the stock.  Despite the run the stock has had, I think the stock is reasonably priced on this year’s earnings and that management will compound value at 15-20% per year.

Business:

The company has been manufacturing and marketing toiletries made exclusively from natural products since it was first established. It was primarily focused on private label and contract manufacturing. It also developed a portfolio of its own brands and acquired others over time. 

Its offerings include skincare (serums, lotions etc), bath & body, hair care, fragrances, self-tanning products, wellness products and other toiletries, plus candles, talc and home fragrances. Creightons also offers product development for third parties from market analysis to formulation, manufacturing and logistics. 

With its own brands and private label business Creightons finds niches where it can differentiate its offerings (products for thinning hair, self tan, sleep health etc). More recently the company has begun to move to higher price points, in particular with its acquisition of the Emma Hardie brand.

Creightons products are sold through department stores, supermarket and drug store chains, specialist beauty stores and is growing its own brands in online retail and DTC channels. Sales are primarily in the UK but also in continental Europe, the Middle East, Australia and to a very small degree the United States. The company growth has recently come more from partnering with growing retailers vs distributors

History & Turnaround (partly excerpted from the Annual Report):

Founded in 1953, it was incorporated in 1975 (as “Hibavend”) and went public on the London “Unlisted Securities Market” in 1987 (as Creightons Laboratories Plc) and was admitted to the Official List of the LSE in 1994. It created a number of proprietary brands, although it focused mainly on private label and contract manufacturing.

Creightons had a torrid time in the late 90s with sales falling off a cliff, boardroom changes, failed M&A and the company losing substantial money (£3.2mm pre-tax loss on £10mm sales in 1997). In 1999 William McIlroy, the largest shareholder, joined the board and brought in fellow Ulsterman Bernard Johnson to manage the operations. McIlroy became CEO and Chairman in 2001 and Johnson was appointed executive director in 2002. Under their stewardship the business was slimmed down, costs cut, assets sold and Creightons returned to roughly breakeven by 2002. Sales troughed at ~£3.8mm in 2003 before Creightons opportunistically purchased the assets of Potter & Moore Brands out of administration, giving them a substantial Private Label and Contract manufacturing business and a new manufacturing location in Peterborough. 2004 sales jumped to £12.2mm and the business turned profitable, which (bar a restructuring charge in 2005) it has remained ever since.

The Group acquired the business and assets of the Broad Oak Toiletries in Tiverton in February 2016 further increasing the Group’s sales reach in terms of product and premium customers and adding to manufacturing capability and capacity. In June 2019 the Group bought the Balance Active Formula brand. The first dividend for nearly 20 years was paid in 2015.

McIlroy and Johnson remain involved, McIlroy with the CEO title though Johnson runs the business day to day, and in 20 years they have grown Creightons to over £60mm sales and £4.3mm net profit. They still run a lean operation and Johnson still sounds excited on calls about the prospect of growing the company. Notably, he waived £132,000 of his bonus entitlement of £265,000 for FY 2021 to increase bonuses available for other employees

Research Resources:

The Company has no analyst coverage, and I have found it difficult to reach management directly outside of earnings calls, but videos of their calls are available, and they are detailed and open in their answers

https://www.creightonsplc.com/investors/reports-and-accounts - Investor Presentations, Annual Reports etc

https://www.piworld.co.uk/?s=creightons – video presentations (also on Youtube)

https://www.creightonsplc.com/assets/reports/2019.pdf - This 2019 slide deck has some useful information

https://find-and-update.company-information.service.gov.uk/company/01227964/filing-history?page=1 – for the full historical filings back to 1987

Segments:

Creightons has three lines of business: (numbers quoted are for FY 21 ex-hygiene sales)

Own brands (26% of sales): Creightons owns a series of niche cosmetics brands. Some are developed internally, such as the BAMbeautiful line, the Curl Company in haircare and Feather & Down in wellness and the Real Shaving Company (sold). Others have been acquired through opportunistic M&A including Balance Active Formula in 2019 and most recently Emma Hardie, just announced in August. The company targets niche areas and submarkets. Sales are through mass market and high street retailers, online stores and increasingly direct to consumers on line.

Private labels (48% of sales): Quality private label products for major high street retailers and supermarket chains, with the majority of stock manufactured to forecast. Clients include Sainsbury's, Tesco, Asda, Primark, Superdrug, Morrisons, Aldi etc. Creightons can offer a full line of products for haircare, skincare, babycare, fragrance etc, as well as gift baskets, seasonal products etc. It offers a quick turnaround to launch on-trend products and has picked up several supplier awards. PL has had a resurgence over the last couple of years as the Company has moved away from the discount sector and towards higher priced retailers and products.

Contract manufacturing (26% of sales): Develops and manufactures products on behalf of third-party brand owners. Products are manufactured to order, with Creightons offering a full suite of services around formulations, manufacturing, logistics etc. Customers tend to be higher end brands, and so the business can be affected by shifts in consumer value preference.

Business mix:

Going as far back as 2004, Private Label was 52% of sales and one customer, Tesco, was 44%. Private Label faced increased price and promotion pressure from big brands and the growth of the value market.  In response, the company diversified its customer base in private label and grew its own brands and contract manufacturing business and by 2017  the largest customer was <10%.

I exclude the Hygiene business in 2021 (included in brands) as the company is no longer active in that business.

There are a lot of puts and takes in the mix shifts above – 

• In FY 2016, Creightons sold off its brand “The Real Shaving Company” and bought the assets of Broad Oak Toiletries (Contract Manufacturing) entering 2017 – hence the significant change in mix. 

• 2018 Contract sales decreased following the decision to not pursue certain low margin gift sales, brands grew with the growth of international and the launch of the Feather and Down brand, and Private Label grew through line extensions and a new retailer win.

• The dip in brands in 2019 was driven by a move out of licensed brands which were margin dilutive and towards owned brands, and a reduction in low-margin UK discounter sales.

• 2020 Contract manufacturing lost a customer who brought the business in-house, but there were significant wins in PL and growth in Own Brands, boosted by over £1mm of acquired brand sales.

• 2021 hit the Private Label and Contract manufacturing businesses due to lockdowns and store closures but Own Brands grew through line extensions and organic growth

The bottom line is that the company has been nimble and opportunistic in moving business towards the highest margin opportunities and pruning lower-return segments. While branded brings high margins I think that having the three separate business lines has helped them to build relationships with large retailers where they can place those brands, and to obtain higher synergies on acquisitions.

HISTORICAL FINANCIALS (in millions of £):

Note: Company’s definition of ROCE is: Operating Profit divided by Equity plus lease liabilities and borrowings. The company built up a cash balance in FY 20 and 21 which drags down the number.

2017 – onwards and upwards

Note the sharp inflection point that occurs in 2017 in ROCE and EBITDA margin, trends that have continued since. Management publicly set targets in 2017 for the end of FY 20/21:

• Sales to double to £60m

• 5% net profit, after tax (from 4.1%)

• 2% dividend 

• ROCE of 20%

which they achieved in FY 2021 (ended March 2021).

The company shed some lower margin business, acquired the assets of Broad Oak Toiletries out of bankruptcy (Feb 2016) and shifted their focus from gross profit to contribution margins and ROCE. They have moved their Private Label business towards more value-added segments, created and bought new brands. They are dynamic and opportunistic – both in M&A and organic product development, even to the rollout of branded hand sanitizer during FY 21 to capitalize on the demand during the pandemic, and shutting down the business as soon as returns fell off again.

Listening to the earnings calls you get a sense of the focus on margins, returns on capital and investment in the business. This has included investing in machinery to deal with increased production and purchasing their manufacturing site in Peterborough for 4mm, a large part of which they may recoup by selling off the portion that they are not using. Growth in sales led the company to outsource production for a while which hit margins, but they have since brought that back in house and will be investing further in automation to increase throughput and reduce unit costs.

Management, Compensation & Major Shareholders:

Most of the management team have been involved for a long time, and have significant skin in the game:

In addition to the ongoing involvement of McIlroy and Johnson, Pippa Clark has been with the company since the acquisition of Potter & Moore in 2003, and has been Global Marketing Director since 2008. Martin Stevens also has over 20 years with Potter&Moore/Creightons. The team has recently been strengthened with a new Head of Operations, Nick Coleman and promotion of Eamon Murphy to the role of Financial Director. In addition, the firm has been adding to its digital marketing team.

Other significant holders mentioned in the annual report hold an additional 13.2% of the outstanding shares.

Total salaries for the group above were £379k and bonuses £421k for 2021, reasonable in light of the size of the company. Management bonuses are linked to profits. McIlroy and Johnson each have a formula, presumably dating back to the turnaround: 12.5% of net profits up to £50,000, 7.5% of net profits between £50,001 and £100,000, and 5% of net profits in excess of £100,000. The rest of the management team are paid bonuses based on group profit targets. The company issues share options to employees (1mm issued last year) and FD sharecount has grown at a CAGR of 1.6% since 2015, a growth rate I expect to continue.

Auditors: The company has just switched from BDO after 20 years to Mazars (https://www.adviser-rankings.com/advisers/122/mazars-llp). UK regulation requires a change of auditor at least every 20 years.

Guidance/Targets:

Having hit their FY 2021 targets, management have laid out new goals (in £ millions)

Sources of Growth:

Management discuss where they expect the growth to come from on the most recent earnings calls

• Organic growth – the overall Health + Beauty segment is projected to continue to grow at 4% through 2025 (per Statista.com). Creightons targets higher growth markets and is also expanding international sales, so should be able to exceed those levels.

• Digital – Amazon, Next Beauty, Boots, Superdrug, Marks & Spencers, Feel Unique (Sephora) as well at DTC through Creightons.com.  This is an area of focus. As shown above, 2021 showed high growth off a low base, and Creightons is investing in digital marketing, social media and looking to acquire brands with significant DTC sales.

• Investing in capacity, automation, flexibility, greening. The company expects to be able to handle double the sales from its existing facilities

• New business: Seeking MHRA and FDA accreditation which would allow them to produce higher margin drug-based creams for contract manufacturing. (MHRA is the UK's regulator of medicines).

• M&A – Looking to acquire Third party higher margin brands with 50% of their revenues on digital platforms. They have £15mm newly extended bank facilities and can sell off surplus land at the Peterborough site to fund this program. The target multiple is 5x EBITDA post synergies. They claimed to have £12mm of revenues targeted in 3 separate brands on the last earnings call, and just closed the Emma Hardie deal. In addition, Creightons bid on publicly traded InnovaDerma earlier this year, though their approach was rebuffed. 

Selected M&A history:

Potter & Moore

Acquired brands and IP rights in March 2003 out of administration for what appears to have been £0.4mm, separately assumed certain leases. In its first full year (FY 2004) sales were £7.8mm and contribution appears to have been about £0.4mm. [Creightons previous management had made a failed £17.9mm bid for Potter & Moore of in June 1998].

Broad Oak:

In February 2016, Creightons acquired certain assets and brands out of administration for 0.6mm, with anticipated first year sales of £3.2mm. Assuming ~5% EBITDA margins (below their 2016/7 levels) that’s a sub 4x multiple before growth. 

Balance Active: 

Branded business, acquired in June 2019 for £0.5mm, first year sales of £1.2mm (on 9 months), at “higher” margins per the CFO. Pippa Clark mentioned on a 2021 call that sales had grown by £1mm. Using annualized ~£1.6mm sales and the company’s 10.7% EBITDA margin that’s about a 3x multiple, and if we include the growth referred to, then possibly closer to 2x

InnovaDerma: (rejected)

InnovaDerma is a UK developer and marketer of beauty, personal care products best known for its Skinny Tan brand. Creightons offered an all-share deal that valued InnovaDerma at £7.7mm based on Creightons share price then. InnovaDerma had TTM revenues of £12.2mm and no EBITDA. Assuming that Creightons could get the business to their own EBITDA margins, that would have been ~6x EBITDA. The bid was rejected.

Emma Hardie:

Creightons paid £6.36mm including £5mm cash and 1.6mm shares. Emma Hardie is a skincare/beauty business with good brand awareness. Trailing revenues of £3.8mm and £0.2mm EBITDA. Creightons project first year sales of growth of 20%. Synergies from bringing production in-house and cost reduction are targeted at £0.6-0.8mm. They expect to double the brand sales by 2024. Taking synergies at the high end PF EBITDA multiple would be 6.3mm/[(0.2+0.8)*1.2]  = ~5x, roughly in line with their target.

Valuation:

Comps

The business is clearly not comparable to the L’Oreals of this world. Smallcap UK peers have issues as comparables - Brand Architekts (formerly Swallowfield plc) has shed its contract manufacturing and is remaking itself as a brand business, Innovaderm is not profitable and just raised capital, Warpaint had a down year and the much larger PZ Cussons is also in turnaround. All have different mixes of brand, distribution, other business lines. I threw in a few other semi comparables. I did not scrub these numbers, so mea culpa for the inevitable errors but the takeaway is that Creightons is comparable or cheap to profitable peers on EV/S, EV/GP and EV/EBITDA. 

If you really want to get silly (and why not?) The Hut Group (THG.L) is out there buying UK beauty brands at 2x sales and ~27x EBITDA post-synergies, albeit the target was a “pure-play online prestige beauty retailer”. So there’s that.

Creightons FY21 results include the £14.6mm of hygiene sales and about £1.6mm of costs related to COVID, most of which will go away this year. Management said that hygiene margins were similar to existing products. You gain back high street sales in PL, contract manufacturing and brands plus ~£4-5mm of Emma Hardie and some organic sales growth from international and digital. Netting it all out I think that the sales base is probably a little under £60mm and EBITDA maybe over £7mm. So maybe 17x normalized earnings and 11x EBITDA. Not crazy cheap, not that expensive.

If management can achieve their 2024 goals, £100mm in revenues and £10mm pre-tax profits, that’s about 8mm after tax and about 10p of EPS allowing for 1-2% a year of dilution from options. At 15-20x, that’s a 150-200p stock in 3 years, or 50-100% upside. To be sure, the guidance is not a slam dunk (though Bernard Johnson sounds very confident in meeting or beating it). I think it’s reasonable – organic growth has been healthy, they’re entering new markets, have shown themselves to be opportunistic and disciplined on M&A, and I think they can fund themselves from cashflows and their bank lines. Share deals such as the proposed InnovaDerma would be less ideal, but I still believe that would have been accretive.

My base case is more straightforward: I think you’re paying a reasonable multiple today for a proven team executing a gameplan that has grown EPS in the 15-20% range since 2004. They have been agile in navigating changes in their business mix and end markets over 20 years, reinvesting capital well and finding profitable niches. There’s still a lot of open space for them to explore. I think returns will be lumpy and there will be ups and downs but I expect value to compound in the 15-20% range for the long run.

Why is it cheap?  

No analyst coverage, and based on their comment on the last call, not much interest in getting any soon.

Illiquid as heck. It's a nanocap and taking in major holders, at least half of the float is locked up.

Not crazy cheap after the recent run. You're playing for growth at this stage

Not a pure play branded business

Risks:

• Brexit: Creightons seems to have navigated it well so far but it may complicate supply chains and sales further over the next few years.

• Lockdowns: Negative for high street sales, and hand sanitizer sales won’t be an offset going forward, but growing online would be an offset.

• Currency risk: Manufacturing and sales are primarily in the UK, but with a growing international presence and exposure to raw materials, margins could experience pressure

• Operations: Creightons will be scaling up manufacturing and employing new machinery/automation. Historically they have been able to outsource to keep up when needed but this impacts margins. New hires should offset the risk here.

• Customer Loss: Creightons has won supplier awards for its product quality and service. Contract Manufacturing has lost business when a customer took business in-house, but by specializing in natural products and seeking certification to produce drug based products the company is moving up the value chain which should mean stickier customers. Private Label has felt competition on price and margins but Creightons has managed to offset this by moving further into value added products and away from commodity lines where it would compete primarily on price.

• Competition in brands: These are small “challenger” brands and the risk of customer loss or displacement on the branded side is real. Creightons manages its portfolio accordingly and has sold businesses such as the Real Shaving Company in the past where growth has stalled, or shut down lines such as its branded sanitizer business when returns fell off, while developing and acquiring new niche lines to replace them.

• M&A: The competition for acquiring smaller brands is hotting up, particularly those with a strong DTC component. The company has done good deals in the past and can create synergies on brand purchases by taking manufacturing in house and cutting overhead. Other players such as Brand Architekts are attempting the same challenger brands strategy with DTC focus and M&A (but without the history, team or manufacturing capability). I can only point to Creightons track record and acknowledge that there’s room for several players.

Catalyst

Further M&A announcements

Organic growth in Branded Business