I covered my entry into InnovaDerma (LSE:IDP) here, as I believed that the departure of Haris Chaudry represented an opportunity. At my entry price in the mid to high 50s, I decided to add more to my position and average up following the release from the last trading statement.
There are several reasons for this:
The company is growing its top-line growth and will therefore grow its bottom-line profits
There is a healthy split between the UK retail channel and the company’s direct-to-consumer (“DTC”) platform
I believe there is a chance the market is not fully appreciating the growth
InnovaDerma has reported that it generated revenues of £5 million, up 28% from the same period of last year when the company achieved revenues of £3.9 million.
However, this a second-half weighted business. Usually, I assume that this means that management does not want to issue a profit warning just yet, but in this case, it is actually true due to the tanning season. Last year, the company achieved FY numbers of £12.9 million in revenue – meaning in H2 it did £9 million. This year, the goal is £15 million of revenue, and so with £5 million in the bag it now needs to achieve £10 million in H2.
I think InnovaDerma’s goals are achievable, and the company reports that “UK retail revenue was almost double that of H1 2019, driven by the Skinny Tan rollout into Boots’ stores, an opening order from Tesco, and continued support from Superdrug”.
Even if the business doesn’t achieve that revenue, it does not carry a high earnings multiple anyway. So, we’re not going to see a sky-high richly rated business topple here. It is a single digit PE.
UK retail and company DTC platform
I like that the UK retail footprint is growing, and with 56% of the revenue coming from DTC (down from 59% last year) – it is a nice split. The company does mention that there was a “softer UK high street retail environment”, but with this being just under half of the revenue it does not carry as big an impact as it could have so long as DTC isn’t affected too!
Market not appreciating growth?
I have been waiting for years to re-enter this stock since I bagged it in 2017. Right now, the market cap sits at a paltry £9 million. The stock has been relentlessly hammered because of the previous chair’s actions, and right now the decks have been cleaned.
We are either going to see one of three options in the FY numbers.
First, we could see a profit warning – which is not good. However, given the lowly valuation, I feel that the downside would be protected, depending on how bad any profit warning would be, of course. There is a big difference between slight miss, and ex-growth.
The second option is the business trades in line with expectations. Which makes it still very cheap, and de-risks the investment case even more.
The third option is that the business achieves profits above expectations (I think this is unlikely – but I would happily be proven wrong).
Therefore, at the current valuation, and the price action now forming an uptrend, I’ve added to my position. I am happy to hold unless the price tanks below 50p or the company issues a profit warning.
Let’s see what happens. I am not a tipster, so you should do your own research!
Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.