MAV Beauty Brands Inc (TSX: MAV) is a global personal care company dedicated to providing consumers with premium quality, authentic and differentiated products. Their 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.

Revenue Mix

Source: Refinitiv (Thomson Reuters)

Investment Rationales

• Solid Performance in 2QFY20: Amid challenging business condition, the personnel care company reported solid second-quarter financial results. MAV's revenue during the period surged by 17% on a YoY basis to US$ 29.6 million, driven by North America revenue, which soared by 24% to US$ 28.1 million. Adjusted EBITDA jumped by 28% to US$ 8.1 million and adjusted Net Income expanded by 59% against the corresponding previous financial period. Also, the global personal care brand reported a steady increase in gross margins and improved free cash flow. Further, their platform consists of a diversified portfolio of brands in durable categories, selling through essential channels. These attributes provide MAV business resiliency, and this was evident in the second quarter.

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

• Relative Price Strength: Over the last 3-Months, its shares have registered strong relative price strength on the stock exchange. In the past three months, MAV shares have significantly outperformed the benchmark index by ~63%, and by ~17% in the past one and ~8% in the last five trading sessions. These price performances were mainly on account of the solid performance the company in Q2FY20 and future growth potential.

Source: Refinitiv (Thomson Reuters)

• Stock is Hovering in a Bullish Zone: At the last traded price of CAD 3.75 (on October 13, 2020, after the market close), MAV shares traded above the short-term as well as long-term support levels of 5-day, 10-day, 20-day, 30-day, 50-day, 100-day and 200-day SMAs. This Implies a strong bullish trend in the stock.

Source: Refinitiv (Thomson Reuters)

• Other Bullish Technical Indicator: The Moving Average Convergence Divergence (MACD) is rising, with the difference between 12-day and 26-day EMAs is positive, which is a bullish indicator. Also, the leading momentum indicator 14-day and 9-day RSI is hovering in a neutral zone and mostly tilted towards the oversold zone.

MACD Chart. Source: Refinitiv (Thomson Reuters)

• Volume Spurt: A volume spurt has been spotted in the past five trading sessions and shares are moving higher, implies that bulls are increasing the strength. In the last five trading sessions, the average 5-day volume traded in the stock was approximately 95% above the 30-day average volume traded in the counter.

• 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 credit risks of its counterparties. Also, the company’s cash conversion cycle is the largest 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.

Q2FY20 Financial Highlights

Source: Refinitiv (Thomson Reuters)

• In 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 Canada/US 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. For the International region, revenue slumped 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 Canada/US 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 to mitigate the impact of temporary store closures in specialty 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.
• Gross profit increased by 17.6% to US$ 14.5 million in Q2FY20, and Gross profit margin, as reported, 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 on June 30, 2020, the company has US$ 54.6 million of working capital compared to US$ 39.0 million of working capital as at 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 filings

Stock Performance

At the closing (on October 13, 2020), shares of MAV traded approximately 0.27% lower against the previous trading session at CAD 3.75. Over the last year, its shares have tested a 52W high price of CAD 6.37 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 41.13% below its 52W high price level and traded approximately 110.67% above its 52W low price level.

1-Year Price Performance (as on October 13, 2020). Source: Refinitiv (Thomson Reuters). 

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

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

Peer Comparison

Source: 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.

Maintaining, enhancing, and growing their brand appeal in North America and internationally is critical to their continued 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 reported a decent financial performance amid a challenging time, which is noteworthy. Further, its shares are hovering in a strong bullish zone, with prices hovering above the moving averages support levels and MACD is also signalling a bullish trend.

Therefore, based on the above rationales, and valuation, we have given a 'Speculative Buy' recommendation at the closing price of CAD 3.75 on October 13, 2020.

*Recommendation is valid at October 14, 2020 price as well.

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