After a year of internal and external challenges, we believe Yowie has built a strong and reliable operational base and business plan that will support continued sales growth and a move to profitability by the end of fiscal 2018. With US$1.25/ADR in cash, no debt and modest working investment needs, we see Yowie shares as compelling value for long-term growth investors.
June quarterly sales of US$4.2m rose 23% from a year ago, including US$0.8m in sales from Australia. Sales in the US were up a mere 1%, helped by expansion in the convenience and grocery markets. Sales to Walmart were down c 15% due to a delay in the launches of Series 3, and Discovery World, which have begun and will continue through Q2 of FY18.
Q1 sales are shaping up to be flattish on a sequential basis. Sales may take a hit from hurricanes Harvey and Irma, which hit the south-east US in late August-early September. In Texas, Harvey forced the closure of at least 134 stores and three distribution centers, however many reopened within a week. In Florida, one Walmart and two Winn-Dixies (a new account) remain shut.
Yowie’s share price dropped nearly 50% since our update note published on 17 May 2017. Investors appear overly focused on the quarterly sales trajectory, which for start-up companies can be very volatile driven by one-off aberrations such as initial order channel fill, supply/distribution chain disruptions, and inventory management at the customer level. Yowie has grown sales from US$2.4m at the end of FY15 to nearly US$20m in two years, with no brand recognition and limited promotion in the US. The company has healthy gross margins of c 50%, administrative expenses that will benefit from increased economies of scale and US$1.25 cash supporting its US$1.60/ADR price. Our target value of US$3.70/ADR is based on a 10% WACC, a sales CAGR of 36% through FY20, tapering to 2%, and an undemanding EBIT margin of 8%.