Vitamins maker and natural health company Blackmores Limited (ASX: BKL) has reportedly secured a deal that will see it expand into the previously untapped Iran market, which is said to be worth "at least" $585 million per year, according to The Australian.
Blackmores set the ASX alight in 2015 as its share price rocketed from around $35 to a high of nearly $221. Much of that was driven by growth in China and other Asian countries, with many of the items purchased by consumers in Australia also believed to have made their way to China via the now famous "daigou" market. That is where a consumer in Australia purchases the items locally before selling them overseas – often for a healthy profit.
What an expansion into Iran means
The company's expansion into Iran will continue that Asian growth trend. According to The Australian, Blackmores will gain access to the market by partnering with local firm Tasnim Pharma after trade minister Steven Ciobo led a delegation to increase trade with the country.
Notably, the delegation also included businesses such as Cochlear Limited (ASX: COH), Graincorp Ltd (ASX: GNC) and Qantas Airways Limited (ASX: QAN).
Ciobo said in a statement:
"I will re-open the Austrade office in Tehran, which has been closed since 2010. The office will play an important role in helping Australian business navigate the market.
With a population of almost 80 million people and a GDP of about US$393 billion, Iran's re-engagement into the global economy offers many opportunities."
Blackmores' CEO Christine Holgate appeared to share Ciobo's enthusiasm. The Australian quoted her as saying Iran is considered to be the "largest untapped market globally" with growth "well into double digits". Tasnim Pharma will begin selling 10 Blackmores' products before increasing that number to 25 brands after a year.
Of course, expanding into new markets with such strong growth potential can be reason for excitement, but it also introduces risks that investors need to consider. To begin with, there is no guarantee that Blackmores' vitamins sales will be as well received in Iran as they have been elsewhere in Asia. There are also cultural and regulatory differences to consider which could hinder progress in the region.
Should you buy Blackmores?
Although Blackmores' shares did trade as high as $220.90 earlier this year, they have lost nearly half their value in the time since and were fetching just $116.17 as at Wednesday's close. That can partly be attributed to valuation concerns, but also to concerns related to its slowing growth rate (as well as struggles in the Korean market).
Group sales did slow down in the fourth quarter of financial year 2016 (FY16), as can be seen in the chart below. By comparison, the fourth quarter was by far the company's strongest quarter of FY15.
Further weakness is expected in the first quarter of FY17 with the company noting in its recent earnings announcement:
"The Australian wholesale market is volatile and has softened in recent weeks impacted by retailers destocking and some exporters changing the channels through which they acquire products. As a result, at this stage we expect our first quarter result to be down compared to the prior corresponding period."
It does expect sales will improve as the year progresses, but it is something investors (and prospective investors) definitely need to keep in mind. That said, Blackmores' shares have fallen considerably from their high levels of January this year and could be worth a closer look. Just note that they are not for the faint of heart, and investors should only ever invest what they can comfortably afford to lose in case the outlook does worsen from here.
