LCCTF - L'Occitane International: Spotlight On Valuations And Revenue Mix (Rating Upgrade)

2024-01-01 08:49:31 ET

Summary

• A potential general offer for L'Occitane has been terminated, but the proposed offer price indicates that the company's shares are undervalued.
• The company's acquired brands, ELEMIS and Sol de Janeiro, are expected to drive robust top line expansion and margin improvement in FY 2024.
• L'Occitane's shares are trading below their fair value and offer potential for significant capital appreciation, which support an upgrade of the stock's rating to a Buy.

Elevator Pitch

My investment rating for L'Occitane International S.A. ( LCCTF ) [973:HK] is a Buy. The company describes itself as a "leading manufacturer and retailer of premium products with a focus on wellness and natural beauty" on its website .

My earlier September 1, 2020 article was focused on L'Occitane's Q1 2021 top line performance and the company's full-year profitability outlook. I turn my attention to LCCTF's valuations and sales mix in the current write-up.

While the potential general offer for L'Occitane's shares might have terminated, the proposed offer price of HK$26 implies that the stock is potentially undervalued. LCCTF is expected to record strong top line growth and meaningful profitability improvement in FY 2024 (YE March 31) and beyond, thanks to the optimization of the company's sales mix. Therefore, I think that L'Occitane is deserving of a higher valuation multiple (closer to a PEG ratio of 1 times) and a Buy rating.

L'Occitane's shares are traded in Hong Kong and on the OTC (Over-The-Counter) market. The three-month mean daily trading value for the company's OTC shares is approximately $10,000 (source: S&P Capital IQ ). Investors can choose to trade in L'Occitane's more liquid shares (three-month average daily trading value of $3 million) listed on the Hong Kong Stock Exchange with US stockbrokers like Interactive Brokers.

Termination Of Potential General Offer Draws Attention To The Stock's Fair Valuation

L'Occitane issued an announcement in September disclosing that its "controlling shareholder, L'Occitane Groupe S.A." has "decided not to proceed with" a "conditional voluntary general offer" for the company's shares. The company had previously revealed on August 11 last year that its controlling shareholder was considering a potential general offer of at least HK$26 per share for L'Occitane's shares, as compared to the rumored offer price of HK$35 as reported in the media.

As of December 29, 2023, L'Occitane's Hong Kong-listed shares last traded at HK$22.30, which is about 14% below the HK$26 general offer price. The market currently values L'Occitane at 18.4 times consensus forward fiscal 2024 normalized P/E based on the company's consensus FY 2024 EPS estimate of EUR0.14 (source: S&P Capital IQ ).

The sell-side analysts' consensus FY 2024-2026 normalized EPS CAGR forecast for L'Occitane is +26.3% based on S&P Capital IQ data. Assuming that the fair valuation for L'Occitane is pegged to a Price-To-Earnings Growth or PEG multiple of 1, the company's Hong Kong shares can potentially rise to as high as HK$31.90 which translates into a capital appreciation upside of +43%. As a comparison, the proposed general offer price floor of HK$26 and the speculated general offer price of HK$35 (as mentioned above) are indicative of PEG ratios of 0.82 times and 1.09 times, respectively which don't seem to be excessive.

In a nutshell, L'Occitane is trading below its fair value. This takes into account the stock's P/E multiple, the company's earnings growth prospects, and the price that the controlling shareholder was potentially willing to pay for the company's shares.

I touch on how LCCTF's new brands have boosted the company's growth outlook.

Acquired Brands Provide Support For Bullish Guidance

L'Occitane left the company's full-year FY 2024 (April 1, 2023 to March 31, 2024) guidance unchanged when it hosted its most recent 1H FY 2024 results call . In specific terms, LCCTF expects to deliver a strong top line expansion of +17% and achieve a +80 basis points operating margin improvement to 12% for the current fiscal year.

The key driver of LCCTF's revenue growth and margin expansion in FY 2024 is the positive change in the company's sales mix with the addition of new brands to its portfolio.

The company bought over the ELEMIS and Sol de Janeiro brands in early-2019 and late-2011 , respectively. These two brands boast superior growth potential and higher margins as compared to the company's flagship L'OCCITANE en Provence brand. At the company's 1H FY 2024 earnings call, LCCTF shared that its FY 2024 guidance assumes "mid-to-high teens sales growth, with a low-teens operating profit margin" and "triple-digit (revenue) growth, with an operating margin of close to 20%" for ELEMIS and Sol de Janeiro, respectively. In contrast, L'Occitane is only estimating a single-digit top line expansion and a single-digit operating profit margin for L'OCCITANE en Provence brand in this fiscal year.

In the first half of fiscal 2024, L'Occitane's Sol de Janeiro and ELEMIS brands have grown to become the company's second and third highest revenue contributors, respectively. Specifically, the L'OCCITANE en Provence, Sol de Janeiro, and ELEMIS brands contributed 55.6%, 25.2%, and 10.2% of LCCTF's 1H FY 2024 sales, respectively. Notably, the core L'OCCITANE en Provence brand accounted for a much higher two-thirds of LCCTF's revenue for FY 2023.

To sum things up, the favorable change to L'Occitane's revenue mix with the acquired brands help to explain why the company has offered a bullish FY 2024 guidance and why the analysts see the company registering an impressive +26.3% normalized EPS CAGR for the FY 2024-2026 time frame.

Concluding Thoughts

L'Occitane's shares warrant a Buy rating. The stock is undervalued based on a comparison of its P/E multiple with its expected pace of bottom line expansion.

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