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Would You Buy A.S. Watson If You Were Temasek?
In the middle of March, Li Ka-shing’s Hutchison Whampoa’s retail segment, A.S. Watson Group (ASW), planned an initial public offering (IPO) to raise as much as US$6 billion ($7.6 billion).
ASW is the largest worldwide health and beauty retailer with close to 11,000 stores operating 14 retail brands across the globe.
On 21 March, Singapore’s sovereign wealth fund, Temasek Holdings, exchanged US$5.7 billion for a 25-percent stake in ASW. Li promptly scrapped his IPO plans.
Although neither you nor I would have access to ASW’s shares for the time being, would you have made the same deal if you were in Temasek’s shoes?
Investment Merits
Resilient Product
ASW sells basic consumables
Once consumed, user has to repurchase the product if he/she wishes to use it again
This creates a constant demand for the products
Global Diversification
The company’s retail stores are located in 25 countries
ASW’s health and beauty segment derives 38.7 percent of its revenue from Asian markets with the balance from Europe
Expansion Plans
From 2007 to 2013, ASW opened net 3,866 new stores to hit 10,581 as of 31 December 2013
The firm expects to open more than 1,200 new stores in 2014
Strong Financials
ASW’s turnover has risen at a 7.2 percent compound annual growth rate (CAGR) over the past seven years to HK$149.1 billion in 2013
In the same period, the firm’s earnings before interest and tax (EBIT) has grown by 21.5 percent CAGR to HK$11.8 billion for FY13
EBIT margin has improved from 3.7 percent in 2007 to 7.9 percent in 2013
Investment Risks
European Exposure
ASW reports its results in Hong Kong Dollars, this would create a foreign exchange risk if the Euro weakens against the Hong Kong Dollar
European saddled with issues since the Euro crisis in early 2009 with the latest being the Russia-Ukraine crisis
Growth Of E-commerce
Based on Euromonitor International’s forecast, the number of internet users are estimated to reach close to 3.3 billion people online in 2020
Health and beauty companies tap on online and mobile platforms to market their products
Physical retail stores may face stagnating or declining sales as consumers purchase products through digital means
SI Research Takeaway
A quick glance at Warren Buffett’s investment portfolio would uncover consumer staples as a key feature. Firms in his list include Coca-cola, Wal-Mart and Proctor & Gamble. These companies produce household name products in the US and the rest of the world.
In Singapore, some listed-consumer staples companies include Dairy Farm International Holdings and Sheng Siong.
Using Temasek’s purchase price as a gauge, ASW is valued at HK$176 billion. Based on its latest financial figures, Temasek paid HK$3.90 for every HK$1.00 of ASW’s total assets. On the earnings front, the transaction price is about 15 times price-to-EBIT (P/EBIT).
At current valuations, Dairy Farm is trading at 3.3 times* total assets and 21.3 times* P/EBIT. Sheng Siong is going at 3.3 times* total assets and 17.5 times* P/EBIT. This suggests that Temasek got a good deal when comparing the three firms’ P/EBIT ratio.
*: Based on 28 March closing prices
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