The BWX Limited (ASX: BWX) share price has dived 38% today after the group behind the Sukin natural beauty products brand issued another big profit downgrade today. For the six-month period ending December 31 2018 BWX now expects to make just $7 million in EBITDA (operating income).
It also claimed today it can post full year EBITDA between $27 million to $32 millions, which compares to prior guidance for full year EBITDA of $40 million.
However, investors should note that to achieve the bottom end of its new EBITDA forecast it will have to deliver at least $20 million EBITDA in the half year ending June 30, 2019.
In other words it will have to pretty much triple first half EBITDA which seems a long shot given this is essentially a fast-moving consumer goods business.
BWX's new CEO blamed the downgrade on softer-than-expected sales in China, poor performance at its recent US acquisitions Andalou Naturals and Mineral Fusion, alongside some issues around Sukin sales.
Given the steep share price falls it seems these excuses and updated forecasts are not washing with investors in a company that only listed back in November 2015.
In the interests of disclosure I should note I sold all of my BWX shares between March and September 2018 concerned about multiple issues around the business.
What really set alarm bells ringing though was an excellent July 10 Australian Financial Review article reporting that BWX was being sued in the US by a former capital markets advisor (Waterloo) amid some surprising allegations.
The allegations made by Waterloo Capital Partners were essentially that BWX's former management team was deliberately chasing acquisitions (such as Andalou Naturals and Mineral Fusion) as it believed it could raise capital from public investors at inflated prices to fund them.
The kicker is that according to the allegations in the AFR article BWX's then management team (CEO and CFO) schemed to cash out their stakes in the business by selling them off at a valuation inflated by the acquisitions that were actually partly paid for with debt.
Reading between the lines this suggests that the acquisitions were not about the synergies and distribution networks as claimed, but rather part of a concocted management debt-to-equity arbitrage strategy to take advantage of the largesse of public investors and enrich its former management.
Subsequent to the acquisitions we've been informed they're not performing to expectations, while their architect in its former CEO John Humble sold the majority of his shares at $3.70 for $25.1 million in October 2018 according to the AFR.
Moreover, the CFO and private equity operator (and sometime advisor to the ex-maangement team) Bain capital have also since departed the business and issued notices to that effect in September 2018.
The June 30 2018 BWX balance sheet shows around $72.8 million in total financial liabilities (debt), which consists of bank debt (around $44.5 million in total) and payments still due for the Andalou and Natural Fusion acquisitions (around $21.8 million in total).
In total $18.24 million of the bank and acquisitions debt is listed as a current liability due to be paid within one year in effect, with the remainder of $54.5 million due later on.
In effect then debt now stands at around 3.5x ambitious forecasts for FY 2019's EBITDA. The reported bank debt is around 1.6x forecast EBITDA, with BWX's lenders likely to be getting nervous given this is based on forecasts for a huge second half. Typically once net debt to long term EBITDA gets to around 3.5x or more companies can expect regular meetings and communications from their bankers.
According to Commsec BWX has a $357 million valuation, which places it on 13.2x the bottom end of its new EBITDA forecast.
The question for investors then is whether BWX can turn itself around based on the strength of consumer demand for its products….
