MAV Beauty Brands (TSX: MAV) is a global personal care company dedicated to providing consumers with premium quality, authentic and differentiated products. Their innovation-focused, next-generation platform consists of complementary and growing personal care brands: Marc Anthony True Professional, Renpure, Cake Beauty and The Mane Choice. The group's products include a wide variety of hair care, body care and beauty products such as shampoo, conditioner, hair styling products, treatments, body wash, and body and hand lotion across multiple collections that each serve a different and personalized consumer need. The group's products are sold in over 35 countries around the world, in over 100 major retailers and through over 60,000 doors.

Investment Rationale

• Solid Quarterly Result: Regardless of the challenging market condition, MAV reported solid second-quarter financial results. The group's total revenue during the surged by ~17% on a YoY basis to US$ 29.6 million, driven by higher revenue from North America, which soared up 24% to US$ 28.1 million. Adjusted EBITDA jumped ~28% to US$ 8.1 million and adjusted Net Income zoomed by 59% against the previous corresponding period. Also, the global personal care brand reported steadily increasing gross margins and improved free cash flow. Further, their platform consists of a diversified portfolio of brands in consumer categories, selling through essential channels. These attributes provide MAV business with considerable resilience, and this was evident in the second quarter.

• Strong Liquidity: The company stood firm on the liquidity standpoint as its current ratio, which reflects the ability of a company to cover its short-term obligations stood at 2.62. This reflects that the company has current assets of 2.62 times higher than its current liabilities. Moreover, the group's liquidity position is better than sector competitors as the industry median current ratio stood at 1.99x. Also, the quick ratio of the company stood at 1.53 better than the industry median of 1.19, but it indicates inventory weightage is higher in the current assets.

• Relative Price Strength: Over the last 3-Months, its shares have registered a strong relative price strength on the stock exchange. The group's shares are up by 50.2% in a month over period and significantly outperformed the benchmark index by 44.62% at the same time. In the last three months, its shares have bagged approximately 43% and outperformed the benchmark index by ~30% at the same time. 

• Strong Bullish Price Pattern: After more than two months of consecutive falls together with a couple of sideway trend, MAV shares have recorded a bullish reversal on August 13, 2020, as it shares breached the crucial resistance of 50-day Simple Moving Average and formed a new strong support level at 50-day SMA and on the very next trading session (August 14), its shares breached the strong long-term resistance and strong phycological resistance of 200-day simple moving average and settled above the 200-day SMA. This indicates that stock is defying all the short-term and long-term resistance and gaining ground for the further upside movement and making support at 200-day SMA level.

• Risk Associated to Investment: In the wake of a distorted business environment led by COVID-19 pandemic and a hovering uncertainty over the next wave of Coronavirus outbreak is exposing the group to credit risks with its counterparties. Also, the company's cash conversion cycle is higher at 236.4 days, whereas the industry median has 126.1 days. This shows higher default counterparty credit risks for the company against its peers.

2QFY20 Financial Highlights

Source: Company Filing.

During the quarter under consideration, revenue increased by 17.4%, or US$4.4 million, to US$29.6 million against US$25.2 million reported in Q2FY19. The revenue was largely benefited from the North America region, as revenue in this region recorded an increased 24.2%, or US$5.5 million to US$28.1 million, as compared to US$22.6 million in the same quarter of the previous financial period. However, revenue from the International region declined by 40.6% or US$1.1 million to US$1.6 million, compared to US$2.7 million in a year over period.

For the North America region, the increase in revenue was primarily due to the addition of The Mane Choice brand in 2019; however, the company also had solid results from the other brands in its portfolio. The majority of the North American food, drug and mass retailers remained open during COVID-19 emergency measures, which helped the group to mitigate the impact of temporary store closures in speciality beauty and reduced retailer traffic overall. For the International region, the decrease in revenue reflects economic volatility in certain markets, as well as the impacts of COVID-19, including store closures and logistics challenges that have delayed product shipments.

The company’s sales costs increased by 17.3%, or US$2.2 million, to US$15.1 million in the period under consideration as compared to US$12.9 million recorded a year before. The increase in the cost of sales on a YoY basis reflects the impact of the increased revenue, the 2019 Acquisition and the related purchase accounting adjustments in the amount of US$0.7 million.

Gross profit increased by 17.6% to US$14.5 million in Q2FY20, while Gross profit margin, remained consistent at 49.0% in Q2 2020. Excluding the impact of the purchase accounting adjustments for the 2019 Acquisition, the gross profit margin was 51.3% during the quarter under review against 49% reported in the same quarter of the previous financial year.

EBITDA increased to US$4.8 million in the second quarter under consideration as compared to US$4.5 million in Q2FY19. The increase in EBITDA was primarily attributable to increase in gross margin of US$2.1 million offset by US$1.0 million increase in integration, restructuring, and other expenses and US$0.7 million increase in selling and administrative expenses. Adjusted EBITDA increased by 27.9%, or US$1.8 million, to US$8.1 million. Interest and accretion expense remained consistent with the second quarter of FY19 at US$1.8 million.

As of June 30, 2020, the company had US$54.6 million of working capital compared to US$39.0 million of working capital as of December 31, 2019. This was primarily because of 162% surge in the group’s cash balance at the end of June 30, 2020 to US$14.86 million as compared to US$5.67 million at the end of December 31st, 2019.

Source: Company filing.

Stock Performance

At the closing (on August 25, 2020), shares of MAV traded approximately 4.56% lower against the previous trading session at CAD 3.35. Over the last year, its shares have tested a 52W high price of CAD 6.34 on October 31, 2019 and a 52W low price of CAD 1.78 on April 01, 2020. At the last closing price, MAV shares have traded approximately 47.41% below its 52W high price level and traded approximately 88.20% above its 52W low price level, which reflects a sharp recovery in the stock price and the stock is more tilted towards its 52W High price level. 

1-Year Price Performance (as on August 25, 2020). Source: Refinitiv (Thomson Reuters).

Also, at the last traded price of CAD 3.35, its shares traded above the long-term and short-term price level of 200-day, 50-day 30-day SMAs, and 20-day SMAs.

The group’s shares were up by 50.2% in a month over period and significantly outperformed the benchmark index by 44.62%. In the last three months, its shares have bagged approximately 43% and outperformed the benchmark index by ~30%.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 64.29% of the total shareholding. MAE (2016) Inc. and Burgundy Asset Management Ltd. holds the maximum interests in the company at 20.13% and 17.18%, respectively.  Further, it reflects that 5 out of top-10 shareholders have increased their stake in the company over the last three months, with Wynstar Enterprise, Inc. and British Columbia Investment Management Corp. are among the top investors in the company which have increased their stakes by 2.38 million and 1.50 million, respectively. The institutional ownership in the MAV stood at 35.89%, and ownership of the strategic entities stood at 28.44%.

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation: MAV Beauty Brands has a diverse collection of authentic and rapidly growing brands that offer consumers a wide range of high quality and innovative products. The products mix, including Marc Anthony True Professional, Renpure, Cake Beauty and The Mane Choice, was assembled to ensure that each of their brands targets a distinct consumer segment with limited competitive overlap. Also, brands position places MAV Beauty Brands to be one of the most relevant and innovative personal care companies in the world.

MAV product innovation is critical to the company’s success. Their disciplined and agile innovation process and unique formulation capabilities represent a critical competitive advantage by allowing them to offer exciting, on-trend products to their retail partners faster and more frequently than the competition.

However, the global personal care industry is subject to shifts in consumer trends, preferences and consumer spending and the company’s revenue and operating results depend, in part, on its ability to respond to such changes in a timely manner.

The group has reported a solid financial performance amid a challenging time, which is encouraging. Also, technical parameters are moving favourably, as MAV shares have recorded a bullish reversal as on August 13, 2020, as it shares breached its crucial resistance of 50-day Simple Moving Average and in the very next trading session (August 14), its shares breached its strong long-term resistance and strong phycological resistance of 200-day simple moving average. This indicates that stock is defying all its short-term and long-term resistance and gaining ground for the further upside movement.

Therefore, based on the above analysis and valuation done using the above methodology, we have given a “Speculative Buy” recommendation, at the closing price of CAD 3.35 (as on August 25th, 2020), with lower double-digit upside potential, based on the NTM Peer’s Average EV/Sales multiple of 2.0x on the FY20E Sales.

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