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Strong growth drivers ready to kick-in

Written by Ed Stacey

Strong growth drivers ready to kick-in
Interim results

InnovaDerma (LON:IDP) reported results on 21 February for the first half of the full year (FY) to June 2019. Results were in line with January's trading statement, with first half (H1) revenues down 7.5% driven by disruptions to the direct-to-consumer (DTC) sales channel. The company has indicated that a number of elements are in place to drive a strong acceleration in H2 - DTC Issues resolved, major new high-street retail channels, ongoing growth in the Roots haircare range. We examine these drivers in this report (p2 and p3)

Valuation now looks compelling

The shares have de-rated materially in valuation terms and now trade on a 2019e price/earnings (P/E) multiple of 9.9x and enterprise value (EV)/sales of 0.9x. We argue that these multiples price-in a low probability of strong revenue growth resuming. The H1 release discloses +37% revenue growth in the first six weeks of H2, and we note that this is without yet realising the benefit of new retail channels to begin in March. We examine the valuation in this report, and we conclude that there is substantial upside potential.

 
 
 
Share Price

 

 
 
 

 

Strong outlook for the second half

We continue to forecast strong revenue growth for FY June 2019 (+24.5%). This is in spite of the 7.5% decline in revenues reported in the H1 results on 21 February, and our expectation is supported by a number of factors. The following charts show the breakdown of revenues by product, and the H1/H2 progression of revenues.

Revenues by product line - 2019e
 
Source: Proactive Research
H1/H2 revenue progression
 
Source: Proactive Research forecasts

During H1 InnovaDerma experienced a decline in revenues from its flagship Skinny Tan range of self-tan and related beauty products. This was driven by a 21.4% reduction in Skinny Tan sales via the direct-to-consumer (DTC) channel, resulting from changes to Facebook's advertising algorithms. Sales of Skinny Tan via high street retail channels increased 15% but this was not enough to offset the fall in DTC sales. The company reports that issues with internet sales have now been addressed, and the DTC channel has delivered growth in the first six weeks of H2.

Meanwhile, the company reported H1 growth of 252% for the Roots Hair Care range that was developed in-house and launched in August 2017. Sales from the other smaller product lines also increased.

InnovaDerma has always shown a strong sales skew to H2 due to the seasonality in the self-tan market. For FY June 2019 we are forecasting a stronger-than-usual uplift in revenues in H2. This expectation is supported by:

  • DTC revenues reported +34% in the first six weeks of the second half (in the interim release)
  • Overall revenues +37% in the first six weeks
  • Momentum continuing in the Roots hair care brand, which now makes up a bigger proportion of the whole
  • Expanded high street retail channels for both Skinny Tan and Roots.

This last point is particularly significant. The 37% revenue uplift in the first six weeks of the half comes before any benefit is included from the major launch of Skinny Tan into Boots stores in March 2019. The following table shows the overall increase in the store presence for both Roots and Skinny Tan.

 
 
 

The increased high-street retail channel in H2 gives us confidence in our forecast for strong H2 growth, in addition to the bottoming and renewed growth in the DTC channel.

Other developments

In addition to the factors discussed above, the company announced progress in other product lines which could begin to deliver a material revenue impact in FY June 2020-2022e.

The Charles + Lee men’s skincare range achieved 67% growth in revenues in the first half. The initial focus has been on the Myers stores chain (Australia’s biggest department store), and the brand will now also be available in Priceline beauty stores and in Terry White Chemmart. Charles + Lee has also launched in New Zealand and is expected to launch in India in H2.

In Life Sciences, InnovaDerma expects to relaunch its Prolong device in 2019, which is the world’s only FDA-cleared device for treating premature ejaculation. The company also expects to launch its GrowLase (Headmaster) hair-loss treatment device, which is an FDA-cleared wearable helmet to aid hair regeneration.

Valuation

We believe that the current share price valuation reflects market concern about the strong H2 revenue uplift required to meet expectations. Our preceding charts and comments explain why we believe the growth will indeed come through.

We would argue that the current valuation effectively prices-in failure:

  • P/E of 9.9x (2019e)
  • EV/Sales of 0.9x (2019e)

The following chart shows the EV/Sales multiple for InnovaDerma over the last 2.5 years.

EV/Sales ratio - 12m forward
 
Source: Proactive Research

We believe that InnovaDerma will trend towards 15-17% earnings before interest and tax (EBIT) margins in the next 2-3 years, with strong double-digit revenue growth, and a net cash position throughout. We would argue that these metrics are consistent with a 2x EV/Sales multiple, which would imply more than 100% upside to the current price. If the company can deliver strong revenue growth in H2 we believe that the valuation could begin to re-rate.

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