Oriflame - The promise of wealth
All,
Please find our updated analysis here.
It’s less a question of price than it is of time. The bonds have dropped just above 50c/€ as not even the much anticipated China reopening could arrest the ongoing slide of member numbers and consequently of revenue. Not a single region is visibly stabilising, let alone making money. On the one hand, perfect storm scenarios like these rarely occur without there being a more fundamental problem or trend. On the other, cash conversion remains strong and interest is still well covered. The company has liquidity and on a constant currency basis, LfL sales shrinkage has narrowed to a mere 10%.
Investment Considerations:
- The bonds are trading at 5.5x our projected FY23 EBITDA of a meagre €60m (pre ifrs16). Considering the near absence of CapEx at the company and the extraordinarily low “one-off” items that we have come to expect on a quarterly basis, this is a low price. Even at this miserable forecast the company looks set to cover its coupon by 1.5x.
- What is holding us back is 1.5 fold: First, we are expecting Q223 will continue to disappoint investors, except that there could be a positive (less negative) surprise from Asia. Second, we fear that Anna Malmhake, the new CEO, will paint a grim picture and kitchen sink Q2 to give herself time for a turnaround.
- The Russian business seems to be in free fall. But that is no different anywhere else at Oriflame and so perhaps it’s no longer worth highlighting - even if it’s the region with the most obvious reason for the plight.
- Still heavy weighs the €30m dividend paid in Q123. The cash leak will be plugged with similarly sized proceeds from the sale of the Russian plant anticipated for Q423, but that is hardly a consolation.
- Noteworthy is that in May the Jochnick family vehicle R12 sold €50m worth of shares in one of its other holdings: NCAB.
- We are looking forward to seeing at least some green shoots before stepping into this name. This will likely mean we will have to buy 10 points higher than here, but at the current trajectory, we value that insurance premium.
The Trend:
- The brightest spot in the analysis is the narrowing of the negative sales trend to now merely -10% p.a. on a constant currency basis. While that is still savage, investors have seen -15% and -18% recently.
- On the last call outgoing management conceded that the company might have raised prices too fast and that it might have lost members as a result. The Price/Mix vs Volume data the company publishes does not immediately confirm that.
- We are not aware of a secular trend against cosmetics MLMs except for the increasing competition from social media influencers promoting products equally available online. Compared to traditional retailing channels, both MLMs and Social Media Influencers play the personal card. Oriflame may therefore be meeting with increasing competition worldwide.
- Other worldwide or even Asia focused cosmetics manufacturers are also doing badly. Not all are doing as badly as Oriflame, but the trend for many is still towards falling sales. Oriflame are not alone. It is however perhaps worth highlighting that tightly managed operations like Douglas are posting deep double-digit growth - at least across Europe.
- FX was a tailwind worth €14m in 2022. Q123 was neutral, but the Euro has been reversing and for 2023 the company is anticipating headwinds of €-22m.
Q223:
- Nothing in management’s portrayal of current affairs, nor their lack of answers on the root cause of the melt-down has made us expect any material improvement for Q223. As per above, however, we think the China reopening may have been misunderstood. Q123 was widely expected to show an improvement in Asia revenues, but according to our models, both Q4 and Q1 were equally impacted by the restrictions and so weren’t going to show secular improvement. In Q223 the company could be showing a full set of unimpacted weeks that might result in something more encouraging than -23% sales. The fall in member numbers by an equal -22% however leads us to believe that the performance wasn’t a matter of weeks without business, but of business without members. The company’s strong performance during 2929 also suggests that it is not as vulnerable to restrictive covid measures as other businesses are.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk