McPherson’s Limited

Product Description: This bond was issued by McPherson’s Limited (ABN 98 004 068 419) in March 2015 and is due for redemption on 31/03/2021. The bond is a fixed-rate issue with a coupon of 7.1% and according to the FIIG Bond Sheet of 21/09/16 was trading with a yield to maturity of 6.61%, running yield of 6.97% and clean price of 101.90. You can find the most up to date FIIG sheet here.

The offer size in 2015 was $30 million. The bond is senior unsecured debt and may be subject to call dates in March 2018, 2019 and 2020. Note that the call price has been set and may be below market price at the time. The notes rank behind secured bank facilities and may be subject to shortfall in the event of a company wind-up. In the 2015 Annual Report (p. 40), McPherson’s reported total liabilities of $184.2 million and total assets of $282.9 million. A significant proportion (around $90 million) of these assets are in intangible and write downs on these are possible in the future. Net assets were reported at $98.8 million. The 2016 Annual Report is yet to be released.

Company Description: McPherson’s was founded in 1860 and registered in Australia in 1913. The company specializes in consumer goods including beauty brands such as A’kin, Al’chemy, Dr LeWinn’s, Manicare; appliances including as Euromaid, Lofra and Studio Solari; as well as household consumables brands such as Multix and homewares including Furi, Stanley Rogers and Wiltshire. The company’s 2015 Annual Report can be found here. The share of revenue generated by each division in the first half of 2016 is given in the chart below.

mcphersons-limited-chart

Data: McPherson’s Half Year Update, see here. Chart: The Constant Investor

The company has been in the midst of a restructure and has recently delivered its first profit growth since 2011. The company has sold down non-core assets and is investing in digital capabilities, international expansion, and brand acquisitions.

McPherson’s is in a period of change: managing director Paul Maguire has announced plans to retire in November. The company is also intending to expand into the Chinese market for skincare. This would further expand the health and beauty division, which currently made up 48% of company revenue in first half 2016.

According to FIIG research, the company is subject to exchange rate risk: around 78% (in July 2015) of its purchases are in US dollars. However, with the dollar consistently lower for an extended period and an increase in profitability, it appears the company has successfully hedged against this risk, so far.

As a relatively small company with a market capitalization of $114 million (see here for more recent calculations), there is a higher level of credit risk, especially given the company is heavily exposed in the low-margin grocery segment (see FIIG’s research here).

However, the recent profit results have been positive. Overall sales have dropped, but after accounting for divestments, the core sales areas have increased. Underlying EBIT has increased 3.6% above the previous year, totaling $16 million. Net debt at 31/12/2015 was $92.8million with a gearing ratio of 46.4% and interest cover of 4.4. This is expected to drop due to the proceeds of the company’s divestments.

Some unprofitable private label contracts have been exited and while margins have been impacted by the weaker Australian dollar, easing commodity prices and branded revenue partially offset this issue. Publication of Annual Report and accounts for the company is expected shortly.

Whilst this corporate bond does expose the holder to credit risk, this may be a suitable holding in a diversified portfolio. The same concerns surrounding the holding of corporate bonds directly (as opposed to a bond fund) as were discussed in the Adani profile apply here.