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Swallowfield sales and margins ready to fly

Personal care product manufacturers are steering away from services in order to focus on launching own-brand products

Swallowfield sales and margins ready to fly

Aim-traded Swallowfield (SWL) is a big innovator in the world of cosmetic packaging. The group is credited with launching the first ever consumer aerosol, the 'instant foaming' shower gel and the UK's first cosmetic pencil. For nearly 140 years Swallowfield has been providing its expertise in manufacturing, design and project management to some of the world's leading personal care brands. But the real value in such consumer goods lies in the power of the brand, which is why Swallowfield's management team wants to channel the group's considerable expertise into creating its own labels.

IC TIP: Buy at 270p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Potential for substantial pick-up in growth and margins
  • Recent acquisition of Brand Architekts
  • Focus on areas with competitive advantage
  • Recent strong financial performance
Bear points
  • Pension scheme deficit
  • Entering a competitive marketplace with new products

A major step in this direction came in late June when Swallowfield spent £11m on Brand Architekts, a London-based owner of a growing portfolio of mid-premium beauty and personal care brands. Swallowfield believes the deal will give critical mass to its own-brand portfolio, which was also strengthened by the purchase of The Real Shaving Company collection in May 2015. This could prove very significant, as a beefed up own-brand business has the potential to substantially boost the group's growth rate and margins.

 

 

Indeed, Brand Architekts has produced a compound annual earnings growth rate of 47 per cent over three years and last year reported sales of £10.7m and pre-tax profit of £2m. Management expects growth to continue, and the impressive sales figures are expected to be further enhanced by Swallowfield's existing resources, including an international footprint (the group has sales offices in New York and Paris), digital marketing and product development. Broker N+1 Singer thinks own brands could account for half group cash profit by 2019. If achieved, this should significantly enhance the attractiveness of Swallowfield for investors, not least because it has the potential to raise the group's cash profit margin from 5.8 per cent to 10 per cent.

For the moment, Swallowfield's core business is focused on manufacturing for other leading cosmetic brands. There has been impressive progress here, too, with the operation now almost entirely focused on higher-margin 'drive' and 'build' product categories, which are areas where the group believes it has a sustainable competitive advantage. This strategic shift was largely behind a 150 basis point improvement in cash profit margins last year, and management now plans to make targeted investments where it sees the potential to strengthen its leading positions.

This new game plan is the brainchild of a management team that took over Swallowfield in 2013 after a turbulent few years that culminated in the ousting of the chief executive. Now the turnaround story is in full flow and prospects are supported by a solid balance sheet following an £8.6 placing of new shares at 155p to help fund the Brand Architekts acquisition. Directors spent £544,000 on the placing, including £423,000 from non-executive Roger McDowell.

SWALLOWFIELD (SWL)

ORD PRICE:270pMARKET VALUE:£45.6m
TOUCH:265-275p12-MONTH HIGH:275p133p
DIVIDEND YIELD:2.3%PE RATIO:11
NET ASSET VALUE:75.7pNET DEBT:34%

Year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201449.10.53.9nil
201549.40.86.52.0
201654.51.612.43.1
2017*67.04.420.75.2
2018*71.55.224.46.3
% change+7+18+18+21

Normal market size: 500

Market makers: 4

Beta: 0.26

*N+1 Singer forecasts adjusted PTP and EPS figures