Description

BIC has been written up once before on VIC - as a short in 2019.  That write-up was well timed and predicted the slowdown in earnings/CF which subsequently occured as the company sought to reposition its business.  While earnings and cash-flow have slowed due to reinvestment and Covid, BIC remains a well-run owner-operated business that trades much more cheaply than similarly positioned consumer peers in shrinking end markets despite (i) continued profitability (ii) a demonstrated ability to acquire, develop, and integrate new business lines as part of a new growth strategy (iii) a strong financial position and (iv) a long track record of shareholder friendly capital allocation.  If BIC traded at a similar EV/EBITDA multiple to similarly situated secularly challenged consumer (or cigarette) companies the stock would rise some 60-100%  (albeit this would put it at a P/E premium but that seems warranted given the stronger balance sheet).  Alternatively, if BIC can actually deliver on its long-term goals of mid-single-digit revenue growth and expanding margins this could be nearly a triple.  Given the valuation and capital allocation policies, anything short of a very rapid unwinding of the business should provide a mediocre cash on cash return.

Overview:

While everyone is probably familiar with BIC and its products I'll briefly summarize: 

The business breaks down into 3 categories: Stationery (now Human Expression), Shavers (now Blade Excellence), and Lighters (now Flame for Life).  The profit engine of the business is lighters where the business is highly regulated and BIC has ~55% global market share (excluding Asia where safety standards aren't as high and low-cost/low-quality Chinese manufacturers dominate) and >70% market share in North America. 

Two years ago BIC began a corporate restructuring following the appointment of a new CEO and a realization (acceptance?) that all 3 product lines were facing secular challenges.  In lighters, e-cigarette adoption and the general reduction in cigarette consumption are headwinds; in stationery, a transition to digital writing is a headwind to BIC whose stationery business is disproportionately focused on staples like ballpoint pens; and in shavers, the move away from one-piece disposable razors (90-95% of BIC's shaver sales) and the entrance of well-funded discount wet-shave providers like Dollar Shave Club and Harry's has been hurting the segment.  While each segment has been facing pressure for years, BIC has been gaining share in each of their 3 categories which has mitigated the impact.  Sales figures for each segment are below:

Note: In late 2015 BIC started incorporating the result of Cello - an Indian stationery manufacturer they acquired - in their stationery figures.  There's a bit of an ugly story here involving Indian corporate governance but suffice it to say, BIC won some legal battles and has complete financial and operational control of the busienss today.  While the business was mismanaged by the Indian founders during the period of legal wrangling the business maintains the market share it had in 2016 and continues to have strong brand awareness.

While profitability at BIC is down (in large part due to the restructuring and, more recently, Covid) BIC continues to be highly profitable (note: in the middle of the last decade margins in stationery were unsustainably high - the reversal of these unsustainably high margins appears, now, as a drag on earnings):

Normalized IFO excludes primarily restructuring charges related to the business repositioning as well as impairments (primarily related to the Indian stationery business).

With the company's assets repositioned, with the corporate structure changed, with additional talent hired, and with the company targeting adjacent markets they are beginning the second phase of their restructuring where the plan is to go from being a manufacuting focused business to a consumer focused one.  Where historically BIC made their money almost exclusively by producing huge quantities of reliable staple products extremely cheaply - utilizing scale and manufacturing know-how - they are beginning to move into higher-value adjacent categories where consumer demand is strong with the intention of generating higher margins and positioning the overall business for mid-single-digit revenue growth.  This strategy is expected to play out in their various categories as follows:

Stationery:

BIC has traditionally focused on the low/utilitarian end of the stationery market (BIC Stic pens being a big part of the business).  Going forward, BIC is working to expand the areas they participate in by adding products in the crafts area and through bolt on acquisitions like the recently purchased hybrid digital writing device Rocketbook.

BIC's purchase of Rocketbook (late 2020) has been successful so far.  BIC paid E35m for the company when it had E27m of revenue and claimed it would be margin accretive to the Stationery business pointing to an Operating Income multiple of ~16x or less.  Prior to BIC's acquisition Rocketbook was growing at 35%/year without any meaningful retail distribution or non-US marketing.  BIC's 1H '21 report stated Rocketbook sales were up "more than 90% in H1".

Lighters:

The strategy here is generally to keep doing what they've been doing but to augment their market position by purchasing higher quality brands, providing more personalization of their standard pocket lighter products, and trying to innovate.  They executed on the first and third of these goals with the purchase of the Djeep lighter brand which they have been systemically rolling out to their markets and the creation of the EZ Reach lighter - a pocket/utility lighter hybrid which seems differentiated enough to grow the market as well as take share from the utility lighter market where they only have 25-33% market share.  Long term this segment is going to be driven primarily by cigarette consumption trends but, for my money, this portion of BIC seems like a more attractive, seemingly cheaper version of BATS exposed to the same secular trends.

For Djeep, BIC paid E40m or 2.5x sales (which were growing but at an unspecified rate).  At similar operating margins to the rest of BIC's lighter business (which I'd wager it didn't have and may not have for some time) this would be ~8x operating profit.

Shaving:

BIC's shaving business was built on one-piece disposable razors.  A bigger focus on environmental impact by consumers as well as the entry of a number of well-funded discount wet-shave providers (Harry's, Dollar Shave Club) have made this a challenging business for BIC and it doesn't appear that those pressures will abate.  BIC has previously determined that they would be unable to enter the wet-shave market due to the scale of Gillette/Schick's marketing spend and the discounting Gillette/Schick provide whenever BIC has made an attempt.  That said, BIC's blades are highly manufactured and engineered - they believe they are comparable to what Gilette and Schick produce and that it would take a competitor years and hundreds of millions of $'s to recreate their expertise.  Given this, BIC hopes to shift this business to become a supplier of blades to newer wet-shave entrants. 

Last I had checked, they had signed a few contracts to that effect but would not discuss anything material about them.

It is encouraging to me that BIC is not making large acquisitions, is not stepping outside of its comfort zone, and is not paying up for hot products in a desperate bid to stay relevant; the acquisitions to date have been disciplined and have come at what look like attractive multiples.

That said, the turnaround story here is something of a matter of faith.  My impression from watching the Capital Markets Day from late 2020 (which I would recommend for anyone looking at BIC) is that they're serious about it, have clear objectives (both internally and that they've communicated to the market), and have established a clear process for producing or acquiring new products which appears to be working (though, admittedly, we're only in the beginning of the transformation and the successes to date seem like more of a proof of concept). 

Given the lack of clarity on the turnaround effort, it is BIC's valuation (even in a scenario where their efforts fail) which makes it an attractive investment.

Valuation:

At present, BIC has a market cap of E2,520 and, with ~E335m of net cash, an EV of E2,185m.

In the LTM the company did E166m of Normalized Earnings putting it at ~15x covid impacted earnings.  Prior to Covid the company was doing ~E230-300m of normalized earnings putting it at 9-11x earnings.

With E1,330 of tangible book value the company trades at 52% of tangible book and generates respectible returns on equity/invested capital.

Going forward, the company has guided to doing E200m+ of FCF for at least the next 3 years with earnings expected to more or less mirror FCF.  At the end of this period the company's guidance is that they will be on a growth trajectory from their new intiatives with revenue growing mid-single digit + and margins expanding (pointing to robust FCF/earnings growth).

Absolute Value/Downside:

With BIC at 52% of book and still highly profitable despite on-going headwinds from Covid, I see this business, even in a melting ice cube scenario, as likely to at least provide a crummy but positive cash on cash RoI over time; some ~6 years of depressed earnings/CF puts this business at 1x tangible book value; 6 years of CFFO plus the current working capital of the business covers all of the business's liabilities as well as its market cap.  With the business owner-operated by the Bich family and given the incredibly shareholder friendly capital allocation policies in the past (and present where they're targetting a 50% payout ratio and have an on-going buyback) I don't see much risk that management bets the farm or flails in an effort to keep their jobs.

Assuming a -6% annual revenue decline and making unfavorable assumptions about: (i) operating leverage (ii) tax payments (iii) working capital/PP&E/CapEx drawdowns I see a basically breakeven investment over 10 years which would point to ~50% downside at a reasonable rate of return.  50% downside is, obviously, a lot but -6% revenue declines seem extremely punative for this business and the inclusion of other punative assumptions paints this as a worst case scenario (my assumptions put EBITDA margins with revenue of E900m at around 3% whereas, in reality, EBITDA margins at that scale were 20% when BIC was smaller).

Since lighters are the profit engine and arguably most at risk of secular decline, a comparison to BATS seems useful.  BATS has -GBP$50bln of tangible book value (+GBP20bln if you just exclude goodwill), earns some ~GBP7bln/year with cash flow of a similar amount against a Market Cap of GBP62bln.  It would take BATS some 16 years at current operating rates to generate enough earnings to reach 1xTBV (i.e. enough tangible assets to pay its creditors and cover equity holders' investment at current prices).  BATS may have more juice if cigarette exposed businesses stabilize given its lower P/E (~9x vs. Bic at ~15x LTM and ~11x pre-Covid) but it seems to have far more downside if deterioration picks up and creditors start to get worried; a similar analysis of BATS as what's detailed above would paint the picture of an equity worth only what they could shovel out the door in the next 4 or so years before the debt roll starts in earnest.

Peer Valuations:

BIC has substantial upside relative to similar businesses with challenged outlooks who are in much worse financial shape:

BIC's poor relative performance in 2020 is more a function of how its specific product categories were impacted by Covid than any secular trends.  Stationery revenues, impacted by school and office closures this past year, were down 26% and accounted for nearly 2/3rds of the 2020 revenue declines.

While BIC is not particularly cheap on earnings, it has more book value and less leverage relative to its peers (which shows up in its lower EBITDA multiple).  On the basis of EBITDA, BIC has 60-100% upside.  To put the P/E and leverage in perspective, if BIC ran with the ~3.5x net leverage NWL/BATS/ONTEX do it could buy back some 70% of the equity at current prices and, at the ~2-3% yields peer debt trades at, see earnings fall by just ~15% which would put the business at ~5-6x Covid effected earnings again pointing to 60-100% upside.  BIC also has far better margins which speaks to the quality of its business and know-how.

Upside:

If BIC manages to suceed at its turnaround and achieves its targets of consistent mid-single-digit plus growth and expanding margins this business could, over the next 3 years:

• Pay you 10-15%+ in dividends
• Buy back a further ~10% of the float (while still retaining some earnings)
• Grow Net Income 8% annually
• Be valued at 20x+ earnings

In which case BIC would be worth ~E120/share and provide a 30%+ IRR to shareholders:

In terms of justifying a 20x+ earnings multiple with BIC growing revenue at a MSD rate and earnings at a high single digit rate, BIC routinely traded at these levels in recent years when its operating momentum wasn't quite that strong.  Additionally, BIC was, for several years, a E100+ stock (figure below is quarterly annualized P/E).

Conclusion:

While I don't have any special insight into BIC's ability to succeed in its efforts to expand its TAMs and begin growing the business again, everything I have seen indicates this isn't just some pipe dream fantasy.  That said, given the uncertainty, I find BIC to be an attractive investment largely because the company: (i) is cheap to peers (and on an absolute basis) even without a turnaround; (ii) seems to have only modest downside in anything but a truly rapid unwinding of the business; and (iii) could provide very strong returns if management is able to succeed in its efforts.  That is, given the risk:reward looks pretty decent even if they fail, an investment in BIC is, in many ways, a low-risk/"free" look at the turnaround.

Catalyst

• Rebound from Covid impact
• Execution on turnaround
• Achieving medium term targets