Beacon Securities head of research, Toronto-based Doug Cooper, analyzed New Look Vision Group’s latest acquisition and concluded that the transaction not only grows New Look’s store count by about 66 per cent, but establishes a national presence for this consumer goods healthcare stock. He says the stock is a ‘buy’ that fits into the aging demographic trend.
New Look Vision Group Inc. (TSX—BCI) provides eye care services and eyewear products in Canada. It operates a complete lens processing facility and a distribution centre located in Montreal.
The company’s products include sunglasses, eyeglasses, ophthalmic glasses and contact lenses. Its banners include New Look Eyewear, Vogue Optical and Greiche & Scaff.
While New Look’s recent acquisitions had pushed it to number one optical retailer in Canada (ahead of Luxottica), it was still heavily regionally focused in Quebec and the Maritimes.
But in July New Look entered into a definitive agreement to acquire Laval, Que.-based Iris Group for $120 million in cash.
Iris is the number seven player in Canada with about 150 stores spread across the country: 82 in Quebec, 36 in British Columbia, 16 in Alberta, 15 in Ontario and one in New Brunswick. Consequently, this transaction not only grows New Look’s store count by about 66 per cent, but firmly establishes a national presence for the company.
Iris generates approximately $60 million in revenue (with $110 million of system sales including stores in which Iris does not control 50 per cent). Mr. Cooper maintains: “If margins are in line with New Look, we believe it would be generating approximately $10 million in earnings before interest, taxes, depreciation and amortization (EBITDA).
“If history is any guide, we believe New Look could bring synergies such as buying power, product mix and lens processing to bear that could yield an incremental $3 to $5 million of EBITDA.
“As such, we believe New Look paid eight times EBITDA, including potential synergies. This is versus New Look’s valuation, pre-acquisition, of about 12 times, implying the acquisition is immediately, and significantly, accretive. New Look has grown EBITDA by about 30 per cent and grown its share count by about 11 per cent.”
Another acquisition could cement national dominance
Mr. Cooper maintains his ‘buy’ rating for New Look and increases his target share price for the consumer healthcare stock from a previous $42 to $44. The only material hole the analyst sees in New Look’s portfolio is Ontario. This could be addressed with additional acquisitions such as Hakkim, a company that the analyst says could drop in value owing to New Look’s growth.
“On the back of the acquisition, which should impact fiscal 2017 in the fourth quarter with the full impact being felt in fiscal 2018, we are raising our fiscal 2017 and fiscal 2018 revenue, EBITDA and adjusted earnings per share forecasts to $229.4 million, $42.4 million and $1.51 and $287.4 million $52.8 million and $1.77 respectively.
“In our view, the New Look story continues to evolve as anticipated. As a reminder, we believe New Look fits into the aging demographic trend—a thesis that is playing out very well with investors in other stocks such as CRH Medical Corp. and Savaria Corp.”
This is an edited version of an article that was originally published for subscribers in the August 11, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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