A Royalty for All Seasons
Royalty streams can form the foundation of some of the most attractive business models. The licensor benefits from a regular stream of income in exchange for allowing a licensee to use its trade mark and other core value-add activities conducted by the licensor (typically procurement, marketing and brand management). Yet, many franchise businesses of this nature, particularly those found in the quick-service restaurant industry, trade at lofty valuations. BasicNet (BAN-IT) bucks the trend and is deserving of further evaluation.
A Burgeoning Brand Portfolio is Created
Founded on May 16, 1983, by Marco Boglione and headquartered in Turin, Italy, BasicNet (BAN-IT) is a unique fashion and textile business. The company controls a range of brands, including Kappa, Robe di Kappa, Superga, K-Way, Jesus Jeans, Sabelt, Sebago and Briko.
Kappa is the best-known brand in the company’s collection and is dedicated to sports and leisurewear. The Kappa brand was created in 1978, having been founded as a sock-maker in 1916. Kappa sponsors sports teams globally with a focus on football, basketball and volleyball.
Superga has become an iconic footwear leisure brand with global appeal. Its most popular model is the 2750 Cotu Classic tennis shoes, which have been produced since 1925 and use innovative rubber vulcanisation technology. These shoes have become popular worldwide and carry prestige and status. Superga was founded in 1911 and merged with Pirelli in 1951, presumably to gain access to its rubber production. The brand was spun off in 1993 and in February 2004 BasicNet acquired a stake, becoming the sole worldwide licensee. In 2007 the remaining shares held by outsiders were acquired by BasicNet to consolidate its ownership.
Superga's Classic 2750 Cotu Shoes
As a fashion label, BasicNet is unique in that it does not produce or distribute collections of its brands. Instead, the group has built a licensee network to which proprietary trademarks are granted to license holders. The sole exception is its wholly-owned license holder, Basicitalia which engages in retail distribution through its brand and factory outlets.
In effect, BasicNet’s in-house team of designers design and develop each brand’s collections. The company then markets and builds each brand through traditional and digital advertising communication strategies ranging from sports team sponsorship through to internet display ads. It then signs licensing agreements with a network of international producers and distributors who receive the ‘formula’ to manufacture and sell the product. In exchange, the company receives a royalty from licensees which are not controlled by the group, equivalent to around 10% on the sell-out of distributors as well as sourcing commissions (c. 6% on quantities of production materials sourced).
Through its team of 70+ software developers, 100+ designers and experts in fashion communication, the company focuses on its core competency – brand management. This strategy creates significant value for shareholders. Sales across the group’s brand portfolio reached €484 million in the first half of 2019 and, assuming growth in the second half is sustained at the same pace, are on track to surpass €1 billion in FY2019. The company grows by signing new licensees or expanding its brand portfolio, either through internal development or acquisition.
A Compelling Valuation
Despite steadily growing sales by 6.9% over the last five years and exhibiting 15%+ EBITDA margins, the business trades on 10x forward earnings. This is possibly explained by the company’s size (market cap of only €236.6 million), lack of proper sell-side coverage and a lack of dedicated in-house investor relations resources. Management is not sitting on its hands and recently authorized a re-purchase of 12.03% of the outstanding share capital.
Risks to the Thesis
Clearly, there are fashion risks to consider as consumers' loyalty to brands could diminish over time, particularly if the brand is 'sweated' by management through under-investment in advertising and promotion as well as design-driven R&D. Whilst the company is diversified across a portfolio of brands, Kappa is the largest and most influential brand, and any deterioration in brand equity would be detrimental to the group's prospects.
Conclusion: A Trademark Business Underpinned by an Attractive Royalty Income Stream
BasicNet has a strong portfolio of brands with heritage, prestige and relevance to young consumers globally. Kappa is proving extremely popular in China and Japan, and there is potential to penetrate Asian markets more broadly across its other core brands by signing new Asian licensees and distributors. This embedded opportunity for growth is not discounted in the current valuation, and hence the shares are recommended for purchase.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.