January 10, 2019 / 3:38 AM / 9 months ago

BREAKINGVIEWS - Temasek helps a drugstore giant flaunt its glow

People walk past a Wastons retail store in Hong Kong March 21, 2014. REUTERS/Bobby Yip

HONG KONG (Reuters Breakingviews) - Temasek is helping a drugstore giant flaunt its glow. The Singapore state investor may sell some of its 25-percent stake in health and beauty heavyweight A.S. Watson, Reuters says. The retailer’s size, moves upmarket in the mainland, and growth elsewhere in Asia could justify a premium to rivals.

The investment behemoth’s 2014 move into A.S. Watson was a bold - and pricey - bet on consumers. It is still the only other significant shareholder in a retail group at the heart of the CK Hutchison conglomerate, founded by Hong Kong tycoon Li Ka-shing. Now the world’s largest drugstore chain, the group has outlets in two dozen markets worldwide, including the flagship Watsons at home, plus supermarkets and beverage-makers.

Watson’s global reach and growth prospects did not come cheap. Temasek splashed out some $5.7 billion for a quarter of the business and a say on the board, amounting to an enterprise value equivalent to a punchy 13 times that year’s EBITDA, Goldman Sachs reckons. Li’s reputation for selling at the top, as well as rising competition from e-commerce, made that even bolder. Even today, U.S. peer Walgreens Boots Alliance trades at around nine times this year’s forecast EBITDA, Refinitiv data shows.

There are still grounds to justify a rich price tag: the retailer’s sales topped HK$83.9 billion, or $10.7 billion, in the six months to June, up a healthy 14 percent year on year. And the group continues to outperform rival bricks-and-mortar chains in terms of profitability, thanks in part to significant own-brand sales. EBITDA margins for health and beauty, for example, have stayed at an impressive 10 percent.

Fast-growing markets like Thailand, Philippines, and Malaysia are powering growth. Moreover, Watson’s health and beauty business in China, which accounted for a third of the group’s total EBITDA, is also experiencing a revival, with aggressive store expansion, online partnerships, and more white-label goods. The business as a whole managed to increase EBITDA by 13 percent year-on-year in the six months to June, compared to a 7 percent annual contraction in 2017.

Taking some money off the table now is shrewd for Temasek. The question is whether cashed-up private-equity outfits or others will be tempted to the checkout.


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