Stockwatch: A potential multi-bagger

Looking for a play on the epidemic of narcissism? Critics of Donald Trump make much of this trait, but its softer version – obsession with self-image – is increasing with social media. And, while it’s typically assumed women are the chief market for creams and potions, men often prove the main buyers to enhance skin and hair. So, it’s hardly surprising a provider of self-tanning and skin “rejuvenation” lotion and anti-hair loss products, has ended up a listed entity.

A £21 million capitalisation at about 180p per share may represent three times forward sales and risks abound for a small company taking on global markets. However, if products gain traction it’s the kind of share able to multiply, partly because there are only 11.8 million issued: see how the forecast for just £0.7 million pre-tax profit implies earnings per share (EPS) near 5p.

InnovaDerma (IDP) listed as a non-index stock in London last September, jumping from about 75p to 120p. In late November it raised £540,000 via a 70p placing to expand into Europe and the US, and improve supply management for its principal “Skinny Tan” brand, a self-tanning lotion that also reduces the appearance of cellulite.

After launching at high street chain Superdrug a year ago, a 3 April update affirmed it is established as the store’s leading brand in this category, despite Superdrug marketing it prominently alongside brands such as Ambre Solaire, Cocoa Brown, Garnier, He-Shi and plenty more stiff competition.

Supportive trends for self-tanning lotion

Despite no firm statistics on customers, it’s quite likely to be younger people, a rising number of whom are living longer with parents hence have more spending cash. There’s also more publicity nowadays about dangers of exposure to the sun amid soaring rates of skin cancer as the demographic which enjoyed the boom in beach holidays abroad, matures. Dermatologists would also far rather people used a lotion than a self-tanning lamp.

The prospect of a weak pound during the Brexit years will also discourage some people travelling abroad. So there’s a combination of factors beyond narcissism, potentially enhancing demand. Any health risk from fake tan lotion seems negligible given its base in glycerine, a simple carbohydrate. Mind that Skinny Tan doesn’t appear patented such that its coconut fragrance and anti-cellulite effect can’t be replicated.

Mixed user reviews online

Skinny Tan has keen social media presence – retail analysts IRI say the so-called ‘selfie generation’ almost doubled sales of bronzers in the past year to £43 million – although user reviews can be tricky to decipher when some complain their critical reviews get taken down, such as on the Skinny Tan Facebook page; there’s also a wide range of opinion with some praising it while others are frustrated with streaks and the tan soon washing off.

Beauticians do rave about the product, although independent user reviews on Amazon (AMZN) show 39 giving it 5 stars versus 33 on 1 star with a quite even balance in between. Priced around £20 for a seven-day “tan”, also makes it an item of discretionary consumer spending as inflation rises, although a low-cost product is planned for launch in grocers and other retailers this year.

The net effect financially has been a significant acceleration in revenue growth during the current half-year to end-June, with January to March achieving the highest-ever monthly/quarterly revenues. Growth from a small base obviously helps, but the company’s direct online sales are performing “exceptionally well”, continental European marketing options are starting up and new stock is in place to serve professional tanning/beauty salons, with over 300 professional tanners trained by the company.

Not a one-product company

At first sight this is a small one-product company trying to take on the world, however, the business originated in Australia and manufacturing has been re-located to the UK with the partner extending products e.g. to a professional spray for use in salons.

There’s also the “Leimo” brand of hair loss treatments with online claims to be “Australia’s leading hair loss treatment with a 96% success rate”. There have been hiccups, though. Four years ago a tribunal forced Leimo Australia to refund a customer £2,250 equivalent after his laser kit, hair restoration package failed to achieve “thicker, fuller and healthier hair” – despite Leimo proclaiming a money-back guarantee if not satisfied. InnovaDerma cites US FDA testing of Leimo underway with approval expected mid-year then a launch of “Headmaster” in the US.

The company intends to build its direct-to-customer platform e.g. via social media, citing a client base over 120,000 across the UK, Australia, New Zealand, Spain, South Africa, the US and Korea; and over 280,000 Facebook fans. The Australian connection persists via recent acquisitions of “Stevie K” cosmetics and “Charles + Lee” men’s skincare, the £31,000 consideration reflecting their small scale as yet.

Interims affirm a speculative growth stock

The six months to end-2016 showed good progress from a small base: like-for-like revenue rose by £1.4 million to £3.2 million as a result of UK sales via Superdrug and direct-to-consumers. Gross profit was up from £0.8 million to £1.8 million, while a £0.2 million pre-tax loss reflected listing costs and development.

Encouragingly, there has been a “very strong start to the second half of the year with January 2017 delivering the highest-ever monthly sales in what is considered to be the slowest month in the self-tanning industry.”

So, another bullish update is possible given the April to June period should see more people looking to show off limbs. Initial sales for Skinny Tan have been achieved in the US including a professional salon range, via several distributors, and there are also talks on marketing in China, Russia and Japan.

Corporate liquidity appears satisfactory

At end-2016 the cash balance was £700,901 due to £1,165,700 net financing during the six-month period. £302,085 was absorbed by operations by way of a modest imbalance between £4.3 million payments to suppliers/employees and £4.0 million receipts from customers; cash flow being cited as a principal risk of growth due to working capital demands to fund purchase and manufacture of stock. Investment activities took another £258,440.

There is no debt beyond £507,000 convertible notes to original Skinny Tan shareholders and related party loans. So the business is adequately financed for now, albeit hard to judge when it might turn cash positive: if sales soar then the company would likely need to raise further finance, but investors would likely be keen.

Dependability on executive chairman

Haris Chaudhry has a vigorous record as a serial entrepreneur, founding InnovaDerma in 2013. The board of directors offers skills, especially in regulatory strategies for market access, although the company’s website provides little sense of management depth which will be critical if fast growth happens.

Often this is where small companies hit trouble even if – indeed because – sales take off. Michael Hume, Superdrug’s ex-senior buyer for skincare, leaving to become InnovaDerma’s general manager for the UK and Europe, just recently, looks a positive.

So InnovaDerma is an interesting speculation to capitalise on social trends: its price/earnings (PE) ratio is up in the thirties albeit likely to remain high – given a tight market – unless problems arise. With few shares issued they are a gamble on multiplying in value if Skinny Tan acquires a cult following and management can cope with growth.

InnovaDerma – financial summary     Estimates        
Year ended 30 Jun 2015 2016 2017        
  9 months            
Turnover (£ million) 0.7 4.1          
IFRS3 pre-tax profit (£m) -0.6 0.3 0.7        
Normalised pre-tax profit (£m) -0.5 0.3 0.7        
Operating margin (%)   6.4          
IFRS3 earnings/share (p) -6.3 2.0          
Normalised earnings/share (p) -5.3 2.3 4.9        
Earnings per share growth (%)     116        
Price/earnings multiple (x)   79.4 37.1        
Annual average historic P/E (x)   40.6 67.7        
Cash flow/share (p) -7.6 -2.0          
Shareholders’ funds (£m) 1.3 1.7          
Return on equity (%) -38.7 12.0          
               
Source: Company REFS              
               

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

By Edmond Jackson | Tue, 25th April 2017 – 09:01