Warpaint — Returning to growth

Warpaint — Returning to growth

Warpaint London’s strategy is to provide customers with access to an extensive range of high-quality and affordable cosmetics. Its focus has been to develop its flagship brand, W7, while capitalising on the growth potential of e-commerce and international expansion. Although the pandemic caused the temporary closure of a number of customer retail outlets, the business remains in a strong position thanks to management’s agility. Cash has been conserved and the business is now debt free. Given its exposure to the gifting segment, results are always skewed towards H2. FY21 has started well, with Q1 revenues up 9% versus the prior year, and management is optimistic that these encouraging trends will continue.

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Warpaint London

Returning to growth

Consumer

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30 April 2021

Price

125p

Market cap

£95.9m

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Share details

Code

W7L

Listing

AIM

Shares in issue

76.7m

Business description

Warpaint London is a UK-based company engaged in the colour cosmetics business, both domestically and overseas. It comprises two divisions: branded and close-out. The former consists of a selection of brands, with the key focus on the company’s flagship brand, W7.

Bull

Fast-growing industry with broad customer base.

Strong trade relationships through close-out history and brand reputation with W7.

Positioned in an industry that has demonstrated resilience to economic cycles.

Bear

Reliance on key suppliers and significant customers.

Business is H2-skewed, and consumer environment is likely to be tough.

Dependence on key personnel, as a result of a relatively small senior management team.

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5257

Warpaint London's strategy is to provide customers with access to an extensive range of high-quality and affordable cosmetics. Its focus has been to develop its flagship brand, W7, while capitalising on the growth potential of e-commerce and international expansion. Although the pandemic caused the temporary closure of a number of customer retail outlets, the business remains in a strong position thanks to management’s agility. Cash has been conserved and the business is now debt free. Given its exposure to the gifting segment, results are always skewed towards H2. FY21 has started well, with Q1 revenues up 9% versus the prior year, and management is optimistic that these encouraging trends will continue.

Business is debt-free despite pandemic

Group revenue of £40.3m in FY20 compares to FY19 revenue of £49.3m, with adjusted operating profit of £2.5m versus £5.6m in FY19. These were affected by the temporary closure of a number of customer retail outlets. FY20 EPS was 3.1p versus 6.3p a year ago. Cash generation continued and cash at year end was £4.9m, and £5.8m at the time of results. The final dividend is recommended at 3.0p bringing the total to 5.8p (as a reminder, including the special dividend of 1.3p paid in November 2020 to reflect the absence of a final dividend in 2019).

Focusing on growth

Warpaint continues to focus on growing the business. It has successfully launched the W7 brand in Tesco and Technic in wilko in the UK, and it is working on expansion in the United States and China. The pandemic accelerated the group’s move to online/e-commerce. The close-out business purchases third-party stock which is then repackaged for sale. While this division is a good source of market intelligence, the group has further reduced its focus in this area with the decision to reduce close-out sales in the US in order to concentrate on selling its own brands. Close-out accounted for 12% of group revenue in FY20 (down from 15% in FY19) and was intentionally reduced further in Q121.

Valuation

Warpaint trades at a substantial discount to the international cosmetics sector on c 60x FY22 consensus earnings. This is warranted by its smaller scale, value proposition, less-recognised brands and own-label offering. We believe the discount could narrow, contingent on the continued successful delivery of management guidance, hence validating the strategy.

Consensus estimates

Year
end

Revenue
(£m)

EBITDA
(£m)

Adj EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

49.3

7.2

6.3

1.5

19.8

1.2

12/20

40.3

4.2

3.1

5.8

40.3

4.6

12/21e

44.5

6.5

6.5

4.6

19.2

3.7

12/22e

49.1

7.8

8.3

4.7

15.1

3.8

Source: Refinitiv, company data

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Financials

Scherzer & Co — FY20 results assisted by AXA and Audi

Scherzer’s (PZS) NAV per share at end-March 2021 stood at €3.12, 83% higher year-on-year. This was a result of strong FY20 income, with PZS’s EPS at €0.42, vs an FY19 loss of €0.08 and an FY12–19 average of €0.12, paired with a low base effect from end-March 2020 (pandemic outbreak). Meanwhile, PZS’s share price somewhat lagged the recovery and the discount to NAV widened to its current 10.9%, while PZS traded at par before the crisis. Following the profitable disposal of its AXA claims, PZS’s extra compensatory claims (ECS) portfolio stood at €122m at end-March 2021 (12% lower year-on-year).

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