Trading Diary

Trading Diary – 23 October 2019

We’ve sold our position in IPH Limited (IPH) and replaced it with a new position in BWX Limited (BWX).


IPH Limited (IPH)

We exited IPH at breakeven. The stock failed to hold and follow through on its earnings release day gap up. Also, the momentum of the stock has slowed down and is no longer ranking in the top decile.

The earnings released to the market were solid. On the day, the market responded with a +10% gap up in the share price. However, this move did not hold, and the stock has trended down ever since. A sale of shares by the CEO and MD of 12% of his holding has not helped. Also, I suspect there’s been selling by the company’s largest shareholder who has been reducing their stake over the last few months.

The stock likely settles into a trading range in the medium-term as the company works through its acquisition of Xenith and the market comes to grips with the company’s new earnings profile.

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BWX Limited (BWX)

BWX produces and sells natural skincare, haircare, cosmetics and other natural products under the Sukin, Andalou Naturals and Mineral Fusion brands.


A massive gap up on the release of earnings in August propelled the stock out of its trading range and kicked off what looks like it might be a new uptrend. The gap up took the stock back to levels not seen since December 2018 when the company issued an unexpectedly weak profit update.

The stock peaked in January 2018 above $8 before sliding more than 80% over the next 12 months. The company went through significant turmoil during this period. Profit downgrades, management changes, attempted MBOs, integrating acquisitions, and all this shows up in the share price.

The December 2019 lows were the culmination of a downtrend which lasted 12 months. This low also represented a significant selling climax defined by significant volume and range expansion to the downside.

The stock has spent most of this year in a trading range. However, there has still been significant volatility during this period, especially as the business itself has continued to reset.

The company now appears stable and ready to resume its growth trajectory. There has been a significant increase in volume as the stock has exited the trading range and moved up. It usually makes sense to follow the direction of the volume, which in this case is up.

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The company is back to trading on a growth multiple, which is at the higher end of our acceptable range. The stock has a price to earnings ratio of more than 50x, and an EV/EBIT multiple of 30x.

Margins were significantly down in during FY 2019. They are expected to bounce back next year along with revenue growth. These two elements combined produce forward earnings multiples that are far more conservative.

The stocks price to sales ratio is less extreme at 3x, and its price to book ratio is relatively low at 1.7x. However, this is mainly due to the high level of intangibles on the company’s balance sheet.

The market is expecting the company to resume its growth path – at both the revenue level and the margin level. Any sign that the company is unable to achieve this expectation will result in a swift rerate back down.


The company had been on a rapid ascent, with revenue tripling between 2016 and 2018. This rise was mainly due to strong growth in the company’s Sukin brand as well as acquisitions.

Profit growth has not kept pace with revenue growth as EBIT margin went from 35% to 25% due to acquisitions of lower-margin businesses.

During FY 2019 margins contracted further to 11% and profit fell substantially. This margin contraction was due to an increase in operating costs primarily attributable to acquired businesses. Also, gross margin was down considerably from 59% to 52%. Again this was due to the impact of an increased proportion of net revenue coming from acquired businesses, which operate at lower gross margins.

Much of the tumult occurred in the Sukin business, which accounts for 35% of revenue. And the company performed quite well in the 2nd half, where sales and gross margin stabilised compared to H2 2018. Still, sales were down 18% in Australia.

The deterioration in Australia disguises the growth in the US business, where sales were up 25%. The USA now accounts for 40% of total sales.

The company expects growth to resume in the current financial year with revenue to grow by 20-25% and EBITDA to grow by 25-35%.

Financial Strength

BWX has total debt of $67.6m, which includes bank debt of $54.8m and deferred consideration for acquisitions of $12.8m. The deferred payment has reduced by $9.2m over the last year. However, bank debt has increased by $4m over the same period.

Operating cash flow improved in the H2 2019; however, the company is still relying on external financing to finance dividends. The group has made improvements to their working capital management, especially inventory, which was down 17% in H2 2019 due to benefits from ERP intelligence and S&OP processes introduced during the year.

Now that the business is on a more stable footing, cash flow generation is critical. I don’t expect that the company will make any new acquisitions under the new management team. Therefore new investments should be able to be funded internally going forward.


The company is emerging from a very tumultuous period in its history. They now seem to be on track to deliver on the long-promised growth opportunity. The company is now under new leadership, and they are in the process of refining and upgrading the businesses operating platform and sales strategy.

The global beauty and personal care industries are growing. Further, the natural and organic personal care market is outperforming the broader market. BWX brands including Sukin, Andalou Naturals and Mineral Fusion are well placed to benefit from this trend.

By Danny Sandler

Founder of Ocean Asset Management.