t&l:-true-value-proven-by-m&a-of-partner-company
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The authors are analysts of Shinhan Investment Corp. They can be reached at shawn1225@shinhan.com and jhwon@shinhan.com, respectively. – Ed.

T&L’s key partner Hero Cosmetics acquired by C&D for USD630mn

The global consumer goods producer Church & Dwight (C&D) announced on September 6 that it has decided to acquire Hero Cosmetics, T&L’s largest partner in North America, for USD630mn (or KRW880bn). C&D owns a number of consumer goods brands, such as Arm & Hammer, OxiClean, and TheraBreath. Its market cap currently stands at USD20bn (KRW27.8tr). With annual sales reaching USD5.2bn (KRW7.2tr) in 2021, it has achieved CAGR growth of over 8% since 2004 through acquisition of more than one consumer goods brand every year. The recent acquisition of Hero Cosmetics is expected to add a further boost to its growth going forward.

According to C&D, Hero Cosmetics’ sales for the trailing 12 months through 2Q22 came in at USD115mn (KRW160bn) and EBITDA at USD45mn (KRW62.6bn). The cosmetics company has been on a steep growth track thanks to strong sales of Mighty Patch, a trouble care patch brand supplied by T&L. C&D estimates that patch products account for roughly 18% of the global acne care market worth USD700mn (KRW1tr), with the target market expected to grow steadily based on an increasing conversion rate. The recent acquisition will pave the way for Mighty Patch to make inroads into global markets outside the US, backed by C&D’s well-established global distribution channels.

C&D’s acquisition to drive exports, further capex within this year

Following the recent acquisition, T&L should see its exports of hydrocolloid grow in earnest from 2023. At the on-site inspection of T&L’s production facilities, C&D reportedly laid out its plan to increase supply volumes of Mighty Patch to expand its presence beyond the US market as well as target the potential addressable market within the US. Accordingly, T&L is set to carry out additional capex within this year to meet the increasing demand. The scale of its upcoming capex is projected to be similar to that of the recently completed one. The two capacity expansions combined should drive up T&L’s annual production capacity from KRW70bn to KRW140bn, which can further go up if a two-shift work system is adopted.

Target price upgrade, shares undervalued given Hero’s salable value

We revise up our earnings forecasts and target price for T&L in view of the expected increase in exports following C&D’s acquisition of Hero Cosmetics. The strong growth potential of Hero Cosmetics translates to high growth visibility for T&L, a supplier of Mighty Patch. In this regard, we believe T&L’s current valuations (2023F PER of 9x) and market cap (KRW290bn) appear excessively cheap considering Hero Cosmetics’ salable value of KRW880bn.

 

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