Blackmores: Revising forecasts for 2H22 headwinds

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
22 June 2022, 8:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Blackmores (ASX:BKL) reports its FY22 result on 18 August. In light of 2H22 headwinds including QLD/NSW floods, Omicron impacting operations, China’s lockdown and economic slowdown and inflationary cost pressures, we have revised our forecasts.
  • The focus of this result will be BKL’s commentary around its strategy to deliver material earnings growth through to FY24. With rising inflationary pressures, competitive and structural threats in ANZ and China’s zero-COVID policy and economic uncertainty, we think this will prove a challenge.
  • Given earnings uncertainty and its full valuation, we maintain a Hold rating with a new price target of (login to view).

FY22 result preview – reports 18 August

No formal earnings guidance has been provided. However, at BKL’s 1H22 result, management said to expect a similar seasonal EBIT skew in FY22 as FY21 (66% 1H weighted). This implied FY22 EBIT of ~A$57.5m.

Result expectations – 2H22 likely to be more challenging than expected

BKL’s 2H22 has been challenging. In China, conditions have continued to worsen with the lockdowns in Shanghai likely impacting BKL’s supply chain and sales. Guidance was for China sales in the 2H to be less than the 1H (benefits from Singles Day), but up on the pcp.

We now forecast 2H22 China EBIT to be down 26% vs 2H21. In ANZ, the QLD/NSW floods forced some pharmacies that sell BKL’s products to close for an extended period. Omicron induced labour shortages impacting supply chains and manufacturing would have also negatively affected operations.

This business would also be subject to inflationary pressures and difficulty sourcing some ingredients, particularly for BioCeuticals. BKL guided to A&P spend of A$10- 15m in the 2H22, but to offset margin pressures across the business, we think it has likely spent less than this amount.

Growth in the International business was expected to slow in the 2H given fewer COVID tailwinds vs the 1H, with 2H growth expected to return to FY21 growth rates. Despite this, there should still be solid momentum in the business with several new product launches. However, we have revised our FY22 EBIT forecast to be more conservative in light of rising inflationary pressures.

BKL flagged at its 1H result that it will continue to rebuild inventory in the 2H22 given supply chain issues and freight is still expensive. Consequently, we expect weaker operating cashflow compared to the pcp. Importantly, we still expect BKL to finish the year in a strong net cash position.

Outlook expectations

To offset inflationary pressures, we expect BKL will implement decent price rises sometime in the 1H23. While this will help maintain margins, it is unclear if this will negatively impact volumes given the cost pressures the consumer is under.

Structural and competitive threats in ANZ will likely worsen in FY23. H&H (owner of Swisse) recently said it aims to increase its market share and reclaim its leadership position in key categories and channels. We think this will mean increased promotional activity and discounting in the grocery channel.

We expect BKL will reiterate that its Business Improvement Plan remains on track to achieve its target of A$55m of annualised gross savings by the end of FY23. We wouldn’t be surprised if BKL increases this target to maintain margins given inflationary cost pressures. 

Given the world has changed since BKL set its FY24 growth targets almost a year ago, we think they now look too aggressive. Both Morgans (A$99.5m) and Bloomberg consensus (A$108.0m) are well below BKL’s FY24 EBIT target range of A$123.8-131.3m.

Forecast changes and Investment view

Given 2H22 headwinds, we have reduced our FY22 EBIT forecast by 7.7% to A$53.0m. With rising inflationary cost pressures, structural and competitive threats in the ANZ market, China’s zero-COVID policy and economic uncertainty, we have reduced our FY23/24 EBIT forecast by 12.9%/15.5%.

After revising our forecasts, our valuation has decreased to (login to view). Given BKL trades on full multiples (FY23F P/E 34.2x), we maintain a Hold rating.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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