Oriflame - question of desire
All,
Please find our updated analysis of Oriflame here.
We had been more negative than many with whom we discussed the name earlier this year, but the results in fact undercut even our expectations. By comparison the bonds are however trading relatively stable. We had previously thought of investing in Oriflame as trying to “catch a falling spoon with two explosives attached” (we’ve been more proud of our quotes). The falling member numbers having only a subdued effect on cash flows and therefore more akin of a blunt spoon rather than a sharp knife. But the uncertainties around Russia and the free-falling Asian business could "blow up” any investment returns.
Investment Rationale:
- We are not taking a position in the bonds until we see some stabilisation of member numbers. While cashflow is relatively resilient and the sale of the Russian plant, as well as the €100m undrawn RCF assure sufficient liquidity, buying Oriflame bonds - at any price - still amounts to a gamble.
- However, the company’s cashflow profile is very strong and even at current depressed levels interest coverage for 2023 looks to be 2x. So we are unlikely to wait for long once we do receive the first positive signals.
- On the downside, the bonds are not secured over the entire group and the CIS business had to be removed from the restricted group - we think to ensure covenant compliance. So there is a risk the business could be plundered before creditors get their hands on it.
Russian Plant Sale:
- Following the sharp drop in Russian business and the headwinds for the Swedish brand that came with the war, selling the fixed cost structures seems like a good idea. In early 2022 Oriflame, which used to export globally from Russia, shifted much of its production destined for international markets to the Polish plant, so the Russian plant must be underutilised now.
- The plant must have cost approx. €90m when it was built in the last decade and even if we apply normal depreciation, the €35m indicated sales price represents a loss. But even so, the price seems fair and we think of the sale favourably.
- We expect the proceeds to come in in Q3, or even in Q423. The sale is subject to unspecified conditions precedent that the company must fulfil during Q2 - now.
- The Russian business, one of Oriflame’s largest, is a self-contained unit that has been carved out of the restricted group before Oriflame took a write-down on the business.
Strategy:
- Is it death by a thousand cuts for Oriflame, or isn’t there a central theme underlying its poor performance?
- Oriflame continue to bleed members across all regions. Asia continues to plummet at a rate of 1/4 p.a. while Turkey and Africa members are down a shocking 40% in Q123. At -14%, LatAm is the star performer in the group and those negative trends have been compounding now for well over two years.
- In times where Bernard Arnaud is pronounced one of the world’s 10 richest men and where Tom Ford sells his empire for $2.8bn, it is slightly incomprehensible to see Oriflame do as badly. The company does not sell status symbols, but even its push to sell only slightly more quality products have met with member resistance worldwide.
- We have come to think that the company must have an image problem. Even Douglas, who are decidedly more mass-market oriented than LVMH for instance, are doing well in this environment, along with the entire affordable luxury segment. Clearly, members out there are lacking that same desire.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk