McPherson’s has posted good results with solid cash generation and debt reduction
The company has ‘reset’ the business to the lower AUD environment, and improved profitability by refocusing towards higher margin business. Financial flexibility has increased with debt reduction improving leverage to 1.5x (1H16: 3.1x). Results are in line with FIIG forecasts.
| | 1H17 | 1H16 | Change % |
| Sales revenue | 149.1 | 168.3 | (11.4) |
| Underlying EBIT | 13.5 | 14.5 | (6.6) |
| Underlying profit after tax | 7.9 | 7.3 | 7.4 |
| Statutory (loss)/profit after tax | (11.8) | 10.1 | Large |
| Net debt | 40.9 | 92.8 | (55.9) |
| LTM EBIT interest cover | 5.4x | 4.0x | 1.4x |
| Net debt/LTM EBITDA | 1.5x | 3.1x | (1.6x) |
Source: Company reports, FIIG Securities
Results summary
- Sales decreased 11.4% to $149.1m (1H16: $168.3m) due to closure of the unprofitable impulse merchandising division and declines in low margin private label and agency revenues
- EBIT decreased only 6.6% to $13.5m given improved margins. EBIT margin improved to 9.05% from 8.6%
- Non cash impairments: $19.8m.
- The demise of the Masters: resulting in non cash impairments of $7.0m and $5.0m in goodwill and brand names respectively
- Revitanail: brand and goodwill subject to non cash impairments of $6.0m and $1.8m respectively
- Non cash impairments drove statutory loss after tax of $11.8m (1H16: $10.1m profit)
Capital management
- Net debt reduced 55.9% YoY to $40.9m (1H16: $92.8m) due to improved working capital efficiency, operating cash flow and the divestment of the remaining 49% interest in the Housewares joint venture
- Leverage (LTM net debt/EBITDA) has reduced to 1.5x from 3.1x at December 2016
- Management stated that 1.0x – 1.5x is the target leverage range
- During the year, McPherson’s bought back bonds totalling $20m of the original $60m issued
- Management stated that it may buyback more bonds utilising its secured bank facility given it is a cheaper source of funding. At December 2016, the facility was drawn to $15m against a limit of $48.25m
Outlook
- Managing Director, Laurence McAllister stated “improved EBIT margins, a more favourable hedged AUD/USD profile and reduced borrowing costs are anticipated to lead to an increase in underlying profit before tax for the second half of FY2017 and for the year ended 30 June 2017 in comparison with FY2016”
- Underlying profit before tax in FY16 was $20.4m therefore McPherson’s is expecting a higher number in FY17
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