The Blackmores Limited (ASX: BKL) share price fell around 2% in morning trade after the vitamin maker revealed its Australian vitamins business is still suffering sharp sales falls compared to the prior financial year.
In Australia for the nine months ending March 31 2017 sales plunged 26% in a result the company blamed on fewer entrepreneurial Chinese shoppers buying the vitamins en masse in Australia to sell through mainly online channels in China.
Some of the slack left by the disappearing Chinese buyers has been taken up by the fast-growing "in-country" China sales that are up 60% to $92 million compared to the prior corresponding nine-month period.
The changing Chinese buying patterns are likely to accelerate over time given that in late March the Chinese government abandoned plans to toughen up rules over cross border e-commerce.
The highlight of the overall result was the continued growth of Blackmores' BioCeuticals business (focused on alternative medicines, whey proteins, therapeutic supplements) that on a comparable basis (excluding the benefits of an acquisition) grew sales 18% to $76 million for the nine-month period.
In total for the first nine months of the financial year the whole group delivered a profit of $43 million on revenues of $496 million, with the profit and revenues down 43% and 6.7% compared to the prior corresponding period. The large profit falls are a result of the fixed cost base and heavy investments the group has made in new distribution facilities and new markets such as Indonesia and Vietnam.
Should you buy?
While the headline numbers look bad the group is coming off a super-cycle in FY 2016 and has now delivered three consecutive quarters off revenue growth. In my opinion investors' attention should be focused on FY 2018 and beyond in order to judge whether the stock offers good value at around $100.50.
If you assume Blackmores is able to grow earnings per shares towards $5 again in FY 2018 then the stock is probably around fair value on 20x FY 2018's estimated earnings on the assumption it retains solid long-term growth prospects thanks to growing demand across greater Asia.
I rate the stock as a hold for now and doubt it will trade much above or below its current price until the announcement of its full year results in August 2017. Blackmores is also quite a tightly held stock with a limited free float and heavy insider ownership which partly explains the high nominal price. Therefore it can be volatile, and if it does get around 10% cheaper I'm a buyer of shares.
