SNYR Writeup
Synergy CHC Corp (SNYR) is a consumer brands company with two main products: Focus Factor, a brain supplement and Flat Tummy Tea, a weight loss tea. The company was founded by Jack Ross who had a background in retail and consumer products when he acquired Focus Factor from a lawyer in New York in January 2015 for $6 million. The brand was popular in the 1980s, but had been neglected for the last couple decades. Jack improved distribution including getting Focus Factor on the shelves of Costco, Walmart, and Amazon, more than doubling Focus Factor’s sales from less than $10 million in 2014 to over $20 million today. Focus Factor sells for $20/bottle on Amazon for 150 tables and is effectively a multi-vitamin supplement that helps people improve their memory.
Parlaying his success with Focus Factor, Jack acquired Nomad’s Choice in November 2015 for $10 million which owned Flat Tummy Tea. The weight loss tea had grown from $1 million in sales in 2014 to $7 million in 2015 and since being acquired by Synergy has grown to over $20 million in sales organically. Flat Tummy tea is sold through social media and direct email advertising campaigns. The company has figured out the formula for successfully marketing the product to millennial women through the brand’s over 1.3 million Instagram followers and paid promoters.
Synergy is now beginning to leverage its successful social media marketing engine to launch new products organically to grow sales. The most recent product is Sneaky Vaunt which is a backless, strapless push-up bra marketed to a similar consumer base as Flat Tummy Tea. The product was developed internally at Synergy and sold over $700,000 in its first month (March 2017) at a healthy 90% gross margin. Maintaining its sales pace for the year, I would expect Sneaky Vaunt to generate nearly $10 million over the next 12 months.
Next up for Synergy is launching a diet shake drink marketed through its Synergy Effect social media marketing engine to the same customer base as Flat Tummy Tea and Sneaky Vaunt. In addition, Synergy will continue to evaluate tuck-in acquisitions for products targeted at millennial women that can be better advertised through the Synergy Effect social media marketing platform. In June 2017, Synergy closed the acquisition of Per-fekt Beauty, maker of skin gels, which sells through Sephora, Ulta, and Amazon, for $0.7 million in stock (SNYR shares valued at $1.50/share in the acquisition) plus a 5% royalty on sales.
Jack Ross owns over 50% of the outstanding shares of Synergy so he is well aligned with shareholders. In addition, Knight Therapeutics (GUD CN) owns 20% of outstanding shares which it gained through warrants which were attached to loans made to Synergy to help the company acquire Focus Factor and Flat Tummy Tea. Knight Therapeutics is a well-regarded pharmaceutical and nutraceutical company run by Jonathan Goodman who was the founder of Paladin Labs which generated a 25% CAGR for shareholders over the 25 years he ran it, culminating in a well-timed sale to Endo Pharmaceuticals (ENDP) in 2014. Paladin Labs success was based on licensing drugs from US companies for distribution in Canada and then paying a royalty to the owner which was a zero-risk proposition for fledging pharmaceutical companies in the US who did not have access to distribution in Canada. After his success with Paladin Labs, Goodman started Knight Therapeutics to continue his previous strategy. Part of Knight’s mandate is to make loans to companies in the pharmaceutical or nutraceutical industries at less than 3x debt/EBITDA, typically charging low-teens interest rates and getting warrants in the business. Synergy was founded with loans from Knight which are nearly all paid off now from FCF generated by Focus Factor and Flat Tummy Tea. Having an investor with the background and reputation as good as Jonathan Goodman lends significant credibility to Jack Ross and Synergy and will ensure shareholder capital is deployed effectively.
Given the rapid organic growth in Synergy’s products and the unique way in which the business was founded, the company is still below the radar. Only about 20% of the shares are publicly traded because insiders and Knight own the majority. While the nutraceutical industry can have mixed reviews because some view the products as “alternative medicine”, the financial characteristics of the business are wonderful including 75% gross margins, high returns on tangible capital, low capex needs which result in strong conversion of EBITDA to FCF.
Synergy has 88 million shares outstanding which sell for $0.45 on OTCQB exchange under ticker SNYR, giving the business a $40 million market cap. In addition, Synergy has $5 million of debt and $2 million of cash, giving an enterprise value of $43 million. In 1Q17, the business generated $3.9 million of EBITDA, putting the run-rate EBITDA at $15.6 million and EV/EBITDA at 2.8x for a capital light business that has a strong track record of organic growth. Comparable nutraceutical companies will sell for 6-10x EV/EBITDA and many consumer branded companies will sell for over 12x EV/EBITDA. I estimate at 8x EV/EBITDA on run-rate EBITDA, SYNR’s fair value is $1.38/share, giving over 200% upside potential. Alternatively, SNYR reported 1Q17 EPS of $0.03, putting run-rate EPS at $0.12 and at 12x P/E, fair value at $1.44/share.
Beyond the current undervaluation, Synergy has a runway to continue to organically grow EBITDA which could drive fair value higher in the future. Sneaky Vaunt was only launched in March 2017, so 1Q17 results only had one month of sales. I expect Sneaky Vaunt to drive an incremental $4 million of EBITDA in the next twelve months. Given success so far with Focus Factor, Walmart is expanding from one skew (Focus Factor) to three (adding Focus Factor Kids and Focus Factor Extra Strength) and increasing from 1,200 to 4,500 stores which could add $6 million incrementally to EBITDA. Synergy acquired Per-fekt Beauty in June 2017 so will start marketing the beauty gel products through its Synergy Effect social media marketing platform which could drive $3 million of incremental EBITDA. Finally, Synergy is likely only a few weeks from launching its diet shake drink, which, if as successful as Sneaky Vaunt could drive an incremental $6 million of EBITDA. All in, Synergy has $19 million of EBITDA growth initiatives including $4 million Sneaky Vaunt, plus $6 million incremental Focus Factor sales to Walmart, plus $3 million from Per-fekt Beauty, plus $6 million from the diet shake. Against the run-rate base of $15.6 million, this could drive EBITDA as high as $34.6 million over the next 12 months. If we assume only 50% of the $19 million in growth initiatives are successful, Synergy’s EBITDA may be $25 million over the next 12 months, 60% growth y/y. Valuing Synergy shares at 8x EV/EBITDA on $25 million in next twelve months EBITDA results in $2.25 fair value, 400% upside potential. At $25 million of EBITDA, I estimate Synergy would generate $18 million of FCF vs the current market cap of $40 million and current enterprise value of $43 million.
