Like Blackmores, Vitaco is seeing surging demand from China. The company says that its Chinese market has grown in a short time from very little to up to 10 per cent of the business, with demand particularly strong for milk biscuits – containing compressed milk powder – and nutritional supplements.
One of the biggest stories on the share market this year has been the astonishing 5.5 times growth in the share price of vitamins and mineral supplements supplier Blackmores Limited, from $35 to $195. Blackmores has been an amazing story, as exports to China surge, Chinese online shoppers demand the products and Chinese expatriates and tourists strip stores in Australia to send the vitamins and mineral supplements home.
The emerging middle-class consumers in China want western health products, they consider Australian and New Zealand brands to be clean and safe, and they have increasing amounts of money to spend. Blackmores has been the prime beneficiary of this, but at $195 a share and 50 times expected FY16 earnings, many investors feel they have missed the boat.
In that case, they don’t have to look all that far for a similar story, priced much more cheaply. Nutritional products supplier Vitaco (VIT), whose brands include Aussie Bodies, Nutra-Life, Healtheries and Musashi, has settled well into listed life since floating on the Australian Securities Exchange (ASX) in September, and is trading at $2.51, a premium of almost 20 per cent to the $2.10 issue price. That is after finishing their first day on the market at $2.38.
Capitalised at $690 million – compared to Blackmores’ $3.4 billion market value – Vitaco is also a vitamins and dietary supplements producer, as well as sports nutrition and health food. The company was formed in 2007 with the merger of two New Zealand-based health and wellness companies, Nutra-Life Health & Fitness (which had been established in Australia) and Healtheries of New Zealand. Vitaco is organised in two divisions, namely Vitamins and Supplements (comprising the Healtheries, Wagner and Nutra-Life brands) and Sports and Active Nutrition and Health Foods (Aussie Bodies, Musashi, Balance, Bodytrim, Healtheries and Abundant Earth).
The core of the business is the Australia and New Zealand market, which continues to grow steadily: already the sports nutrition market in Australia and New Zealand is the world’s second largest. Vitaco is the market leader in the Australian sports nutrition category, with 20 per cent market share. But Vitaco also exports and distributes products worldwide, under its own brands and also through contract manufacturing for private-label clients worldwide. Vitaco exports branded products to more than 30 countries around the world with a particular focus on Asia and the Middle East.
Like Blackmores, Vitaco is seeing surging demand from China. The company says that its Chinese market has grown in a short time from very little to up to 10 per cent of the business, with demand particularly strong for milk biscuits – containing compressed milk powder – and nutritional supplements. Vitaco is also targeting the growing sports nutrition market in Brazil, with the Aussie Bodies brand of protein powders, and further expansion in the UK, but building the China business is the main focus.
China is a major opportunity for Vitaco, says broker Morgans, given that Euromonitor International estimates the size of the country’s vitamin and dietary supplement market, at about US$16 billion, boosted by a growing fitness culture. Vitaco’s Healtheries Milk Biscuits/Bites and Goats’ Milk Powder are selling particularly well, and are in strong demand by Chinese children. After a number of food scandals, Morgans says many Chinese consumers are wary of local manufacturers and accordingly prefer the quality – and perceived reliable safety – of Australian and New Zealand products. The broker says growth in China has also been helped by opening up of the free trade zones in China, the rise of cross-border e-commerce and the fall in the A$.
Up until now, Vitaco’s sales in China have come mainly through traders and sales on Chinese online sites, such as Tmall, but Vitaco is now investing in resources based in China to manage its marketing efforts and distribution relationships. Morgans projects that 11 per cent of sales in FY16 will go to China, up from 8 per cent reported in FY15.
Vitaco has built its brand line-up by a steady acquisition policy, with the most recent additions being the Bodytrim weight-loss system (2014) and Musashi protein-based sports nutrition (2015). The manufacturing, distribution and sales team is experienced in integrating new brands into the Vitaco fold, and once Musashi in particular is fully integrated – expected in FY17 – Vitaco is expected to generate significant improvements to free cash flow as efficiencies are realised and cost duplications removed.
Morgans believes Vitaco can achieve net profit of $13.3 million in the current financial year, which would be a 20 per cent lift on the previous year and – even more importantly – it would come in 5 per cent ahead of the prospectus forecast. In FY17 the broker expects Vitaco to boost net profit to the tune of 35 per cent, as it benefits from the Musashi synergies and further growth in its underlying business and markets. Morgans says Vitaco is well-placed to report strong double-digit growth for many years to come, as consumers increasingly demand nutrition products, it launches new products and expands its distribution network both in Australia, New Zealand and overseas.
Importantly, the expected growth will not place undue pressure on Vitaco, which is only using about half of its manufacturing capacity: it can rapidly scale-up to accommodate growth, and can bring outsourced manufacturing back in-house to increase margins further. Vitaco is also a potentially attractive takeover target, of pharmaceutical/nutrition companies wanting to leverage into strong Asian demand. But longer-term, the main driver for Vitaco will be the significant growth in demand for health and wellness products from the burgeoning population of middle-class consumers in Asia. At the current share price of $2.51, Morgans reckons the stock is trading on a normalised, fully diluted price/earnings (P/E) ratio of 25.1 times earnings – or half what Blackmores buyers are being asked to pay – and falling to 19 times prospective FY17 earnings.
On the analysts’ consensus forecast collated by Thomson Reuters, analysts see the stock heading to $3.00, which would represent a 19.5 per cent gain from here (Morgans is a bit more optimistic than consensus, looking for $3.25). The dividend yield is not much to write home about: 2.1 per cent expected in FY16, but starting to look a little more attractive in FY17, at 2.9 per cent. In short, Vitaco looks a very attractive opportunity at current levels.
