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Recent news-flow reinvigorates the investment case
InnovaDerma (LON:IDP) specialises in the development, manufacture and marketing of clinically proven products in life sciences, beauty, and personal care. The company operates a portfolio of strong innovative brands, with the UK & Ireland and Australia currently its biggest markets.
Since listing in 2016, the company has delivered a revenue compound annualised growth rate of 60% (two years to June 2018e), driven by its flagship Skinny Tan product range.
However, the share price weakened significantly during the period August 2017 – March 2018, as we believe the market has been concerned by some slower quarters of revenue growth. We argue that more recent news-flow points to a re-acceleration of revenue growth.
On August 8 InnovaDerma announced that its Roots hair care range will be sold through 432 Tesco stores from November, in addition to its existing deal with Superdrug, and prior to that it announced an agreement with Boots. The Roots product range was developed in-house by InnovaDerma and has already been a material revenue contributor in the year to the end of June 2018. We believe that the Tesco deal further strengthens the growth trajectory for Roots.
In addition, the company announced that Kieran Callan will become the new chief executive officer (CEO) of the company, with existing CEO and founder Haris Chaudhry becoming executive chairman. The share price has responded positively to the Roots deal and the further strengthening of the executive team.
We believe that InnovaDerma can sustain strong revenue growth, through both Skinny Tan and Roots, as well as other product lines. By the financial half-year stage (December 31, 2018) we believe the market could have solid evidence for a reacceleration of revenues. The company has guided for revenue growth of at least 30% for the year to June 2019.
With this kind of growth rate, together with a strong balance sheet and strong prospective profitability in the medium/near term, we believe that the current enterprise value (EV)/sales multiple of 1.52x appears pessimistic. We examine this further on page 2.
The chart above shows the enterprise value (EV)/sales ratio for InnovaDerma since its market listing in 2016. The EV figure is defined as market capitalisation minus net cash (or plus net debt) using a 12-month rolling net cash figure, and with sales also measured on a 12-month rolling basis.
We believe that the de-rating during the second half of 2017 and the first half of 2018 reflects slower sales growth for the Skinny Tan range, which we surmise the market has interpreted as evidence that the group is running out of headroom for growth. More recent increases in the share price have still only taken us back to an EV/sales multiple of 1.52x. Our view is that a company with secular (not driven by a cycle) revenue growth in strong double-digits, and with prospective earnings before interest and tax (EBIT) margins of 15-20x, should normally trade on an EV/sales multiple of 2-4x. At an EV/sales of 2x, the shares would be trading at 195p.
Going forward, we see a number of strong revenue drivers for InnovaDerma.
Skinny Tan: In spite of slower growth in recent quarters, we believe that Skinny Tan is still at an early stage on its growth curve. It is important to note that this product will soon be completing its exclusivity agreement in the UK with Superdrug. While Superdrug will remain an important retail partner, we believe that additional retail channels could be added that potentially accelerate the growth.
Roots/Other: The Roots hair care range was launched in August 2017, and has got off to a bright start. We believe that the Tesco and Boots deals support further growth. Other product lines are at earlier stages of commercial ramp-up, and could further enhance growth in 2019-2021.
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