Join our community of smart investors

Bargain shares: Primed to clean up

Aim-traded beauty brands business is relaunching a slimmed down brand portfolio, launching a new website to cross sell its products and delivering eye-catching growth from its flagship brand.
Bargain shares: Primed to clean up
  • Small underlying annual operating loss of £0.3m on 2 per cent lower revenue of £16.3m.
  • Gross margin up 1.7 per cent to 36.9 per cent.
  • Net cash up £1m to £19m (110p a share) year-on-year.
  • Imminent relaunch of seven brands and new marketplace, unexpektedstore.com.

Aim-traded beauty brands business Brand Architekts (BAR: 163p) has delivered a resilient financial performance in the 12 months to 30 June 2021.

The directors have not only weathered the Covid-19 pandemic and well documented cost headwinds that have faced all retailers (supply chain and logistics), but successfully ramped up sales of flagship skin care brand Super Facialist, revitalised seven other core brands for relaunch in the current quarter and invested in a new marketplace, theunexpectedstore.com. The brand portfolio is now focused on 13 key brands (down from 21) with product lines halved.

Super Facialist increased sales by more than 30 per cent to £3.1m, accounting for almost a fifth of group revenue, buoyed by agreements with the likes of Sainsbury’s. At the tail end of the 12-month reporting period, the group also signed new distribution agreements with Tesco and Morrisons, the benefit of which will be seen in the current financial year. House broker N+1 Singer believes “the brand is well on track to hit a revenue run-rate of £5m.”

Brand Architekts also absorbed £300,000 of new product development costs in the financial year, mainly for the relaunch of seven brands – Dr Salts+; Kind Natured; Happy Naturals; SenSpa; Argan; Beautopia and Root Perfect – and launched a new brand The Solution. The relaunches were pushed back due to offline retailers delaying their instore builds until September and October this year, otherwise the group would have benefited from a higher return on its investment in the period.

Simon Thompson's 2020 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 07.02.20 Bid price 28.09.21 DividendsPercentage change (%)
XaarXAR42p176p0.0p319.0%
CreightonsCRL44p118p1.15p170.8%
Metal Tiger (see note two)MTR11.8p21p0.0p78.0%
Cenkos SecuritiesCNKS56p83p4.5p56.3%
Anglo Eastern PlantationsAEP570p630p1.1p10.7%
NorthamberNAR54.9p57p0.6p4.9%
Chenavari Capital Solutions (see note one)CCSL61.4p35p0.0p3.4%
CIP Merchant CapitalCIP57p57p0.0p0.0%
Brand ArchitektsBAR160p160p0.0p0.0%
PCF (suspended)PCF33.3p23p0.4p-29.7%
Average     61.3%
FTSE All-Share Total Return index7,7967,994 2.5%
FTSE AIM All-Share Total Return index1,0991,456 32.5%

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange

 

The headline loss also factors in £250,000 of capital expenditure for new online marketplace theunexpectedstore.com. The website is being powered by market leader THG Genuity under a commission arrangement. Launch is imminent. The aim is to ramp up online sales to £10m over the next five years by cross-selling product lines to consumers and leveraging off Super Facialist’s high growth initially to get more of them to buy online. N+1 Singer believes the new marketplace could generate sales of £1m to £2m in the current financial year, rising to £3m to £4m the year after. On this basis, it will make an operating loss of £0.75m and £0.25m, respectively. However, on £10m of annual sales, the website should make £2m cash profit, hence why the directors are highly focused on their digital initiatives. Importantly, Brand Architekts remains well funded with net cash of £19m (100p a share) accounting for 72 per cent of its market capitalisation of £26.3m.

After factoring in the expected operating loss from the new website, N+1 Singer expect the group to report an operating loss of £1.2m on revenue of £16m in the current financial year. But there could be scope for outperformance as Brand Architekts continues to win new business overseas, Super Facialists is outperforming rivals, and the board may invest less than budgeted on marketing to drive traffic to the new website.

The end game here is creating a group that can generate £50m of sales and upwards of £8m of pre-tax profit to create a £100m plus market capitalisation company within five years by embracing an omnichannel approach led by digital initiatives. I included the shares, at 160p, in my 2020 Bargain Share Portfolio and continue to see potential for material shareholder value creation over the coming years. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.

They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.