Australian manufacturing is not dead. Not when the likes of Pental Limited (PTL) are still flourishing in business.
At its 24/7 factory in Shepparton in northern Victoria, Pental makes a range of home care and personal care products, including soaps, detergents and bleaches, and other consumer goods. The company is Australia’s largest soap manufacturer. Pental makes some of Australia’s most famous brands around the home, including Lux washing flakes, White King cleaners, Pears soap, Sunlight soap and dishwashing liquid, Velvet soap, Country Life soap, Softly laundry liquid, Huggie fabric softener, Martha’s Country Wool Mix laundry liquid, Janola bleaches, Jiffy and Little Lucifer firelighters (Pental is the only firelighter manufacturer in Australia), and AIM toothpaste.
The sales focus has been on Australia and New Zealand, but this year, Pental has expanded into the Chinese market, following the trail blazed by Bellamy’s and Blackmores, and tapping into the same desire of Chinese consumers for clean, high-quality Australian products.
In March Pental began making the specially designed Chinese export range, which it built around its Country Life brand. The range includes goats’ milk soap, lanolin, tea tree (melaleuca) oil and eucalyptus oil, and features images of sheep, koalas and kangaroos. The company committed to manufacturing the range after securing distribution arrangement with leading Chinese supermarkets, pharmacies, airport stores and online outlets, including FTZmall.com.
In August, Pental shipped the first container of Country Life goats’ milk soap to China – $700,000 worth of the stuff.
The company expects to sell about 6 million bars of soap, worth $4 million, to Asian consumers in the first year, compared with current bar soap sales in Australia and New Zealand of about $10 million a year.
The diversification is welcome, given that at present Pental makes 80 per cent of sales in Australia and 19 per cent in New Zealand, with just 1 per cent currently going to Asia.
In FY16, Pental’s gross sales fell by 1.1 per cent to $110 million – constrained by major plant upgrades and plant performance issues – while net profit rose by 10.6 per cent to $5.6 million. The full-year dividend was boosted by 14.3 per cent to 2.95 cents a share, fully franked, a payout ratio of 71 per cent.
At year-end the company had zero debt, with net cash of $12.3 million on the balance sheet. Pental reduced its banking facility from $16 million to $5 million at its discretion, retaining substantial capacity to redraw as required. The company is keeping its power dry because it is contemplating exercising its option to buy the Shepparton manufacturing facility and land, between 1 July 2017 and 30 June 2019, at an estimated cost of $7.5 million (transaction costs plus taxes). Shareholder approval to do this is needed because ex-director Alan Johnstone currently owns the plant: this will be put to the annual general meeting next month.
Pental is also ploughing money back into ongoing plant upgrades, the addition of a new bulk liquids plant, brand extension (Country Life), marketing and advertising and investment in developing new commercial and industrial distribution channels – as well as the Asian expansion.
It’s a far cry from 2012, when Pental – then known as Symex Holdings, and mainly a chemicals manufacturer – went through a near-death experience, suspended from trade after failing to repay a loan to ANZ Banking Group. Only one of its three business units was profitable, and the Oleo chemical business, which made plastics and personal care items, was no longer viable, hurt by the rising Australian dollar.
The company reported a net loss of $60.67 million in FY 2012, with total debt ballooning to more than $60 million – more than four times its then market capitalisation. Adviser M&A Partners led a restructure, including a one for seven renounceable rights issue, which raised $19.3 million at 1.5 cents a share.
ANZ wrote off $10 million in bad debt, sales and marketing group Sales Link came on board as a cornerstone investor in the consumer products company, pumping in $3.7 million for a 17 per cent stake, and a deal to provide retail marketing services to Pental. Existing shareholders Allan Grey and ex-director Alan Johnstone contributed additional funds, ending up with 17 per cent and 19 per cent stakes respectively. Then-chief executive Alan Fisher sold non-¬core assets, closed under¬-performing businesses and sold the company’s former manufacturing site in Port Melbourne for $25 million, with the funds used to clear debt. The only assets Pental kept were its core consumer staple brands.
The other thing that saved Pental was buying White King from US giant Sara Lee in 2011 for $50 million. The company was already manufacturing the product in Australia on behalf of Sara Lee, and when the US owners told it they were looking for a buyer, the then Symex realised it could lose the work unless it stepped up as that buyer. The purchase buttressed the rest of the portfolio, and enabled Pental to put all manufacturing operations under one roof in Shepparton.
Now the company could be poised for its next wave of expansion, into Asian markets. According to Thomson Reuters, analysts’ consensus forecasts see Pental lifting earnings per share (EPS) by 8.9 per cent in FY17, to 4.4 cents, followed by a 15.9 per cent rise in FY18, to 5.1 cents. The analysts see the dividend rising to 3 cents a share this financial year and staying there in FY18.
On those numbers, Pental, at 60 cents – which capitalises the company at $82 million – is priced at 13.6 times expected FY17 earnings and 11.8 times expected FY18 earnings. Those are very attractive metrics, well below the Household Products industry average price/earnings (P/E) multiple of 19.8 times FY17 earnings. On a yield basis, Pental is also highly alluring, trading on a prospective fully franked yield of 7.1 per cent (FY17 and FY18).
Small wonder, then, that Thomson Reuters has the analysts’ consensus price target on Pental of 72 cents, a 20 per cent premium to the current price. Asian expansion always carries risk, but Pental appears to have a solid backing for its optimism, and a receptive market. This is a very impressive small-cap stock.
