• Companies like La Doria have to be bought at the bottom of the food cycle
  • Price catalysts are growth, fair long term cycle valuation, dividend growth and takeover target
  • The book value per share of €6.42 and €2.74 of cash per share with a stable long term debt being only 53% of equity provide a good margin of safety. However, buying on the dips of Italian stock market cycles should be the best option.

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Company overview

La Doria S.P.A (LD:IM BRSAITALIANA) is an Italian producer and distributer of tomato-based products, fruit juices, pasta sauces, preserved vegetables and canned pasta.

Figure 1 La Doria’s competitiveness

figure-1-competitiveness

Source: La Doria

It distributes its products mostly through private labels (92.5% of revenue). 4.6% of revenue comes from company brands and 2.9% from industrial brands. 60% of revenue comes from its manufacturing business while 40% comes from trading activities that are obviously at a lower margin (stable 4% EBITDA margin).

Figure 2 Revenues by brand

figure-1-revenue-by-brand

Source: La Doria

La Doria (LD) is owned by the Ferraioli family (63%) while the rest is free float. It was founded in 1954 and went public in 1995. With the received by the IPO and debt later the company made several acquisitions which make it a growth oriented company. The last acquisition was in 2015 when LD acquired Gruppo Pa.Fi.al. Srl that is the holding entity of Delfino S.p.a and Althea S.p.a for €65.2 million. With this acquisition, LD increased its footprint in the higher quality (prepared sauces) segment and in countries like Germany, France, Belgium and Australia which are the target’s company primary private label market with 73% of revenues. We can expect LD to further consolidate by acquiring smaller Italian privately owned producers and distributers and increase its global footprint. Examples of past acquisitions are Pomagro S.r.l., Oriental & Pacific Ltd., Sanafrutta Group and the already mentioned Pafial Group. For now, the strategy to acquire smaller producers has proved profitable as they enter the distribution system of the mother company.

Figure 3 La Doria production facilites

figure-3-production-sites

Source: La Doria

LD brings an Italian quality food product to European private labels. The main influences on LD will be vegetables and fruit prices and currency effects for its UK exposure.

LD’s strategy is to further consolidate the existing Group market share, focus on international expansion, especially in the US and China, grow the higher added value product category like the premium and organic segment, reduce its exposure to tomato-based products due to the line’s volatile margin by growing other product lines and extend its product range through acquisitions.

LD’s advantage in comparison to its competitors is the product diversification. For example, Mutti s.p.a, a privately-owned tomato brand, has also been growing at 8% per year but is focused only on processing tomatoes. Mutti’s CEO openly mentions his interest in sector consolidation which indicates that also LD can be an acquisition target.

Financial overview

LD has been constantly growing since its IPO in 1995. Revenues have grown at a compound annual growth rate of 7% in the last decade. This growth wasn’t linear as it was influenced by market circumstances and acquisitions. As LD grows the benefits of acquiring smaller Italian producers will be bigger and bigger.

Figure 4 LD’s revenue performance

figure-4-revenue

Source: La Doria

LD’s debt policy is exemplar for a steady stable growth company. After acquiring companies LD lowers its gearing ratio by accumulating equity and quickly bringing down liabilities to €100 million after each acquisition.

Figure 5 LD’s gearing policy

figure-5-gearing

Source: La Doria

The current long term debt position is €106 million with Italian banking institutions. Italy managed to recently sell €5 billion of 50-year bonds at an interest rate of 2.85% (October 2016). However, it is Italy we are talking about and we should expect some volatility in interest rates but we estimate that there will be no difficulties for LD related to their long-term debt and refinancing when necessary.

By being constantly profitable in the last 8 years and by having a dividend pay-out ratio between 13% and 20% LD managed to constantly increase its equity to the current €199 million or €6.42 per share. On top of the profitability and despite the acquisition and dividends LD managed to be cashflow positive in the last five years that results in a current cash position of €85.1 million or €2.74 per share. The high cash position offers the opportunity for new growth acquisitions and reassures investors in relation to LD’s debts as 85% of its long-term debt can be covered with its balance sheet cash.

One of the main investing implications to understand related to LD is the growth in margins related to the increase in value added and shift from trading to manufacturing. Revenues have growth to €748 million in 2015 from €484 million in 2011 or 54% while net profit went from €4.1 million to €44.8 million, representing an increase of 992%. It can be estimated that due to its diversification among sectors LD will be able to remain profitable in various food price cycles.

Guidance and expectations

As revenues declined in the first half of 2016 by 3% due to currency movements the continued deterioration of the pound will have a severe impact on the company in the upcoming years. As the weakening of the pound has been similar in percentage in in Q3 2016 to the fall in 1H 2016 we can expect a similar impact on revenues going forward, thus -3%. If the pound further weakens we should increase this number. This -3% directly impacts earnings as costs remain in Euro. Perhaps the weakening of the pound will spur inflation and counter a bit on this effect.

The management foresees continued sales price deflation in Europe, slowing consumption in some countries, increased raw material costs and uncertain effect related to Brexit but also signs of recovery from mid-2017. Even in this depressed environment LD expects to maintain good margins and profitability. The base for the recovery is the lower tomato inventory in 2016 due to bad weather that should push prices higher going forward into 2017. Revenues and margins are further expected to recover in 2018 as Brexit pricing is absorbed. The management does not give guidance on the U.S. and China even if they state that those are markets they will focus on as the brand Made in Italy can have a competitive advantage there.

Figure 6 Key forecasts up to 2018

figure-6-key-forecasts

Source: La Doria

The negative guidance will have a significant impact on the industrial sector margins for 2016 and 2017 while the management expects EBITDA margins to recover in 2018 thanks to the expected increased volumes and prices. Trading margins are expected to be stable and the UK business is expected to see inflation to counter for the weakening in the pound.

All in all, EPS are expected to be €0.95 in 2016, €0.80 in 2017, and €1.07 in 2018. These expectations are much lower than the EPS of €1.44 reached in 2015 but that was an exceptional year. The important thing is that LD is continuing on its stable growth path amidst food price cycles. This involves volatility in EPS but also creates investing opportunities.

Figure 7 LD’s economic targets and past performance

figure-7-financials

Source: La Doria

The above chart shows how LD manages to grow on a stable basis inside the economic and food pricing cycles. We discuss investment opportunities in the next chapter.

Return on investment

If LD continues to grow on its stable average 7% yearly growth rate in five years we can expect revenues to reach €1 billion. As LD focuses more on manufacturing growth and keeps trading stable margins should improve. Also, as we are currently in a down part food pricing cycle due to the omnipresent deflationary environment in Europe inflation or increased food prices should push revenues and margins higher eventually. By keeping the current conservative margins for future estimations LD’s EPS in 5 years would be at €1.4. With a PE ratio of 15 for a stable low risk food company we should see a price of €21 per share. This should result into a return of 20% per year excluding dividends somewhere in the next 5 years.

Given the past profitable acquisitions, operations in a stable business segment with short term volatility and the opportunity to increase its presence as a premium brand in China and the U.S gives a high probability that the above described scenario will develop itself.

In the meantime, we can expect a dividend of around 20% of net income or €0.16 per share if we take the lowest estimate EPS for 2018. At the current price of €9.15 it gives a 1.7% yield.

The biggest margin of safety comes from the book value per share of €6.42 and €2.74 of cash per share with a stable long term debt being only 53% of equity. Also, as 78.8% of revenue comes from outside Italy LD would not be heavily impacted by eventual economic turmoil in Italy. What would impact it is a general European recession but this would probably hinder growth for the period and not put the company at risk as LD’s products are not discretionary.

We estimate that the bad guidance and UK Brexit risk is already included in LD’s stock price of €9.15 and consider it a buy. At current earnings, it reflects a PE ratio of 6.18 while at expected 2017 earnings a PE ratio of 10 which is still a cheap valuation for a stable growth food company with international European revenues.

Figure 8 LD’s stock prices

figure-8-la-doria-stock-price

Source: Borsa Italiana

Do not get confused by the extremely low price back in 2013 as it is the result of the Greek crisis, European recession, fear of Italy going bankrupt and lower net profits for LD due to economic circumstances. Nevertheless, LD was profitable even in those difficult times for Europe and trading below book value of €3.96.

We cannot know what will happen in Europe in the next few years as given the complexity of the economic environment and variety of country risks bear markets are always around the corner. Therefore, there is space for further price declines and a cost averaging strategy is advised. Given the historical averages and market outlook LD is poised to benefit from its market position even if economic circumstances might postpone it. A recession might compromise the managements outlook and send the stock price lower but we see LD as a good risk reward play at current prices.

A possible benefit to LD is further consolidation in the sector. Food companies constantly rebalance their portfolios in order to create the best growth paths. In 2014 Unilever sold its North America pasta sauces business under the Ragu and Bertolli brands to Mizkan Group for $2.15 billion while the same company is continuing to acquire smaller food producers around the world, and also in Italy. Latest example is the acquisition of GROM, an Italian based ice-cream chain.