At time of writing, shares of Blackmores Ltd [ASX:BKL] are in a trading halt as the vitamin giant goes for a capital raise.
The Blackmores share price is in a rut, as you can see below:
The BKL share price is on five-year downtrend, and Blackmores investors will be hoping that the capital raise announced today will lay the foundation for a rise back up the charts. We look at why Blackmores opted for a capital raise today and its outlook going forward.
Blackmores share price reflects competition, increased costs, lower profits
Back in its heyday in 2015, Blackmores was the growth stock.
It seemed everyone wanted BKL shares because the rise of the Chinese middle class and their desire for ‘clean and green’ Aussie products would underpin their growth for years to come.
But the vitamin space is certainly competitive.
Their major competitors include Swisse Wellness Pty Ltd, and Sanofi-Aventis Australia Pty Ltd.
And despite record profits in 2015–2016 of $100 million, a move to cut out third-party manufacturers by purchasing a Melbourne factory didn’t quite work out as planned.
Costs associated with the move, which was finalised in October of last year, weighed on profits.
Until recently, Blackmores had a history of paying dividends too.
Their largest dividend was a final dividend of $2.10 which came in 2016 at their peak.
Blackmores subsequently scrapped their dividend in February of this year after a 46.9% slump in profits.
Getting rid of a dividend is a great way to preserve capital, but shareholders loathe it.
You can see the sharp plunge on the chart above when the move was announced.
Coronavirus didn’t help and BKL’s share price returned to August 2019 lows on the outbreak.
So it’s understandable that Blackmores is opting for a capital raise in this environment.
The details of the capital raise
Here they are:
- Institutional Placement of $92 million at a share price of $72.50
- Share Purchase Plan (SPP) of up to $25 million
- SPP shares to be available for, ‘the lower of the Placement Price; and a 2.5% discount to the 5-day volume-weighted average price of Blackmores’ shares up to, and including, the closing date of the SPP (currently expected to be Friday, 3 July 2020); and a 2.5% discount to the closing price of Blackmores’ share on the closing date.’
- Combines for a total of up to $117 million
Goldman Sachs is the underwriter, and this marks Blackmores first ever capital raising.
The money will be used to strengthen the balance sheet and go after growth in Asia while improving efficiency.
A quick look at Blackmores financials
The Blackmores capital raise will give it some wiggle room with liquidity of $236 million according to the presentation released today.
Going back to their February half yearly report a few things stand out:
- Revenue down 5.2% to $302 million
- Profit down 46.9% to $18.2 million
- Cash and cash equivalents of $33.7 million
- Receivables of $117 million and Inventory of $129 million
So the company was clearly a bit light on cash, which explains the capital raise to strengthen the balance sheet.
Blackmores is trading at a P/E of 36.6, at time of writing.
While this is not necessarily a crazy number for a company with solid growth prospects, it could be construed as quite high for a company that just took a sizeable hit to its earnings.
Outlook for Blackmores share price
The BKL share price reflects a tough period for the company, and it’s moving to shore up its finances in the wake of the pandemic.
The chart above shows one resistance level at around $95 dollars.
Were the Blackmores share price to reverse the downtrend in the coming months, this level could become relevant.
Blackmores went from a major growth company that payed a dividend to needing a capital raise quite quickly.
As such, the outlook for the BKL share price is potentially clouded by the pandemic. It will be interesting to see what their annual report in August shows.
Lurking in the background is growing trade tensions between Australia and China as well.
The company is forecasting largely flat numbers for the year, meaning a turnaround could take time.
That being said, it is still a profitable company with a powerful brand.
It’s specifically geared for a post-pandemic world, and best of all it’s free.
For The Rum Rebellion