What's new
On November 15 2021, L’Occitane announced the acquisition of a 83% equity stake in Sol de Janeiro, a US premium body care brand, with a cash consideration of US$373.5mn (100% of equity value of US$450mn). Total consideration shall be paid with cash and bank facilities (around Eur40mn in cash and Eur300mn in credit at 1% interest rate). Management expect to close the deal by end-2021. After the acquisition, L’Occitane will hold 83% of shares in Sol de Janeiro, and co-founders Ms. Heela YANG and Mr. Marc Capra will hold the remaining 17%. Ms. Yang and the key managerial persons will continue to direct the development of Sol de Janeiro.
Comments
We are positive on the acquisition. Key takeaways from the call:
Building a leading portfolio of premium beauty brands and reaching geographical balance. The company believe Sol de Janeiro is a strategic fit for the company in terms of brand position, global presence, profitability, and growth prospects. Sol de Janeiro’s body care business in the US is complementary to L’Occitane’s geographical balance strategy of building a portfolio of strong brands in all major markets. Post consolidation, Sol de Janeiro could leverage L’Occitane’s wide footprint to expand into new markets (e.g., APAC, considered the next “blue ocean”). Ms. Yang plans to allocate further investments to product development and brand awareness.
Relatively fair valuation given solid fundamentals and growth profile:
The acquisition is based on U$450mn 100% equity value of Sol de Janeiro, implying 4.4x 2021e P/S and 21.1x P/EBITDA, which is relatively humble compared to 6.4x PS and 22.5x P/EBITDA during the acquisition of Elemis in January 2019. The multiples imply US$103mn in sales and US$21.3mn in adjusted EBITDA in 2021, representing a 3-year CAGR of 63% and 85%.
Around 8% sales and 9% net profit annualized increases after consolidation. For Sol de Janeiro’s performance, management guided a 30-40% revenue CAGR in near term, driven by robust demand in existing markets (e.g., North America) and potential from new markets (e.g., APAC); maintaining EBITDA margin of over 20% and estimated 15% NPM given stable channels (24% from brand owned e-commerce, 76% from wholesale partners) and digital driven business model (limited D&A costs, low operating leverage).
Valuation and recommendation
We lift our FY22 revenue and net profit forecasts 2% and 3%; lift FY23 revenue and net profit forecasts 8% and 9% factoring in the consolidation of Sol de Janeiro starting from January 2022 (namely, FY4Q22 and FY23). We maintain our OUTPERFORM rating and lift target price 6% to HK$36 (32x Fy22e P/E and 24x FY23e P/E, offering 15% upside). The stock is trading at HK$31.4, implying 27x FY22e P/E and 20x FY23e P/E.
Risks
Slower-than-expected Elemis ramp-up; worsening of COVID-19; forex fluctuations.