Imbalie Beauty (ILE) released their FY 13 results a couple weeks ago and I went and chatted to the CEO.
In a nutshell, Imbalie's FY 13 revenue rose 15%, but margin pressure and some once-offs and dilution relating to the Perfect 10 acquisition resulted in HEPS dropping 0.58cps (FY 12: 1.07cps). FY 13 cash flows were positive, but the Group is still paying down debt from its turnaround and is sitting in a net overdraft position of R3.6m (FY 12: R4.5m).
The acquired Perfect 10 studios at the start of FY 13, adding c.50 more stores to the Group’s franchisee footprint. Part of the acquisition was the issue of shares, thus the weighted average numbers of shares in issue rose to 346m (FY 12: 236m).
Imbalie current has 153 stores nationally with 59% in Gauteng, 15% in Western Cape and 12% in KZN. The Group’s intention is to grow the franchisee number to 300 stores in the next 3 to 5 years, targeting predominantly (but not entirely) the small towns dotted across South Africa.
Besides revenue- and fix-based royalty fees from its franchisee network, Imbali also sell significant product to these stores (c.70% of product sales) and through Edgars stores (c.30% of product sales). The key in-house brand is ‘Placecol’ (accounting for roughly 50% of the Group’s turnover), and newly signed exclusive agency agreements with international players include BioEffect (launched only in May 2013, i.e. FY 14).
Also interesting is that the Group has an R35m assessed loss (likely to be offset against any cash tax payments for the next 5 to 10 years).
I've run a basic two stage DCF has assumed a CoE of 15.2% ('Rule of Thumb' beta of 1.5x), Terminal Growth Rate of 3.5% and medium-term growth rate of 10% that builds up a fair value for ILE of of 13cps with a 12m TP estimate of 15cps.
In other words, the share (for all its upside and downside) appears quite boringly fairly valued.
As a local African beauty franchising Group operating with strong exposure rising LSMs, Imbalie is an intriguing business to watch. But, the reality is that I don't buy businesses at fair value, I (try to) buy businesses (as far) below fair value (as possible)... As I don't see any value in the stock at these levels and both an elastic product/service offering and a fragile balance sheet create downside risks in the Group, this is not a share that really interests me.
That said, BioEffect may be a significant contributor in time, but it is too early to say how this product (that was developed in the European markets) will be taken up by the first Emerging Market (South Africa) it is being launched in. That and the fact that I am a man and don't (really) know how to judge the quality, brand, appeal and future attraction of a product like this...
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