Bought: L'Occitane International SA (HKSE:0973)

In an earlier post, I described how I disposed of almost all my REIT investments. I had initially intended these REITs as inflation hedges. History shows that real estate is a relatively stable asset class during (hyper) inflation. Turns out that a REIT is not the greatest wrapper for real estate holdings. It often comes along with a lot of debt. I decided to abandon my REIT strategy.

That does not mean my worries about inflation are gone too. I switched my attention towards consumer staples stocks to address those worries. 

The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently, so you don't face the problem of continuous reinvestments involving more and more dollars because of inflation. That's one reason why real estate, in general, is good during inflation. It's a one-time outlay and you also get the rise in value as well. A brand keeps increasing in value and is a wonderful thing to own during inflation.

In contrast, the utilities and rail road business keep eating more and more money. Your depreciation charges are inadequate and the real economic profits poor. Any business with heavy capital investment tends to be a poor business to be in during inflation and in general for that matter.

(Paraphrased from Warren Buffett, Berkshire Shareholder Meeting 2015)

L'Occitane is a cosmetics company that offers several brands: L’Occitane en Provence, Elemis, Sol de Janeiro, Grown Alchemist, Melvita, Erborian, and LimeLife. Most of the products are targeted towards women. Let me disclose here that I am male and not familiar with any of these brands. Thanks to social media, I did some basic vetting of these brands. The Instagram page of L'Occitane has 947K followers, Sol de Janeiro has almost the same amount. Elemis has 533K, Erborian 219K, Grown Alchemist 167K, Melvita nearly 100K and LimeLife 68K followers. These numbers are for the general pages of these brands. Most have additional country pages with localized content and separate communities. To calibrate these numbers, let's look at competitor and market leader L'Oreal which has more than 10 million Instagram followers just for its leading brand. However, L'Oreal has a 241 billion USD market cap, whereas L'Occitane clocks in at 4.3 billion. This quick sanity check tells us that L'Occitane has a good position in the cosmetics universe but also has room to grow.

Stock researcher Morningstar considers the core brand L’Occitane en Provence as mature. It expects growth to come from Elemis and Sol de Janeiro. The Morningstar analyst also expects sales to shift from retail stores to e-commerce. The analyst is optimistic about L'Occitane's brand equity and attributes a narrow moat (= competitive advantage) to the business. In conclusion, Morningstar considers the share significantly undervalued. I don't want to reveal more details because this Morningstar research report is behind a paywall. I am a subscriber and find their research occasionally insightful. In this case, Morningstar's report was very helpful for my research.

Adding to my conviction is the family ownership of L'Occitane. Mr Reinold Geiger holds 72.82% of the shares. He is not the original founder of L'Occitane but has developed the group from a local French operation to an international business. At age 74, he is stepping back from the company, but two of his sons remain active.

L'Occitane sells its products on a worldwide scale. Its headquarters are in Luxembourg and Switzerland, while the listing is on the Hong Kong Stock Exchange. The dividend withholding tax is taken by Luxembourg, where it is 15% of gross dividends. This will be hard to claim back. If L'Occitane increases its dividend payout ratio from 0.2 to 0.4, as was common before the Covid lockdowns, we are looking at a 4% dividend yield. This is good for a growth company. At the moment of this writing, the share still seems cheap. 

Last minute addition: as I was finishing this post, news came out that Mr Reinold Geiger is considering de-listing L'Occitane by bidding on the shares listed in Hong Kong. He may then list L'Occitane on another exchange. This news is unconfirmed, but it is likely true, as such a move is common sense considering the circumstances. I am only holding L'Occitane for a few weeks, so this might become a quick profit for my portfolio. On the downside, I need to find a suitable replacement for L'Occitane, and I have not seen many bargains recently.

Disclosure: Long L'Occitane International SA, when publishing this blog

Sold out: Beshom Holdings Bhd aka Hai-O (No more confidence)

I have held this share for over two years and have watched it decline slowly over that time frame. Last week, I cut my losses at -22%, including dividends. Beshom breached my minimum market cap rule of 100 mln USD long ago. I don't think that it will ever grow back to that amount. Beshom sells TCM (Traditional Chinese Medicine) products under the Hai-O brand name. It also targets the Malay/Muslim population with consumer staple products under the brand name Sahajidah. Hai-O is mainly sold through physical stores and e-commerce, while Sahajidah products are distributed through an MLM scheme.

There are always controversies surrounding multi-level marketing schemes. I realize that not every MLM is a Ponzi or pyramid scheme. However, legitimate MLM companies like Herbalife and Amway occasionally raise legal and ethical questions too. There is another concern. MLM seems to be disappearing slowly. People have no more time and desire to meet up and sell pots, pans, and Tupperware boxes to each other. We now have e-commerce sites like Amazon, Shopee and Lazada, which offer much more transparency on the value and quality of everyday products. Gathering information about products and ordering them is much more efficient through these websites.

Let me be clear that I did not discover any legal or ethical issues surrounding Beshom's MLM operation. It looks like they sold a popular water filter in 2017. Revenues and also the share price peaked that year. Unfortunately, it has been only downhill from there. I guess that end-users don't need a new water filter every year. The Covid lockdowns have been a factor here too. However, we do not see Beshom recover like most retail stores now that these lockdowns have ended.

Perhaps Beshom should drop the MLM component altogether and focus on its wholesale and retail operations. There is room for improvement in its e-commerce business. I noticed a significant presence of Hai-O products on Lazada and Shopee, but the monthly sales numbers are low. The Hai-O brand can be found on the packaging of vermicelli, bird's nest, tea, coffee, medicine and many other categories. When you spread your brand so broad and thin, it is not much more than a seal of approval. It becomes like a house brand of a supermarket. This type of marketing will not allow you to charge higher prices than your competitors. Hai-O does have an Instagram presence, but it looks like a message board rather than a lifestyle destination. It has less than 2,000 followers. Hai-O seems clueless in the modern world of retailing. I don't see where the brand is going. 

To end positively, let me note that Beshom has no debt. In fact, 30% of its market cap is in cash. The balance sheet is solid, and there are resources to turn the business around. I do not like to bet on turnarounds, but this might be an interesting opportunity for other investors.

Note to self: no more investments in MLM-related companies.