Investment journal 10.7.2019: Back to Apetit

This stock has not been good for me. I think it’s the second stock I wrote about in the blog. It’s perennial under performer in the Finnish food sector and I have been waiting for turnaround since 2015.

Two years ago, I even jumped in as new management updated strategy and sold some bad assets. That ended badly, but now I’m back in.

This morning, Apetit announced that it has sold Fresh Food business. In new press release middle of the day, they revealed that the transaction price was 13 MEUR.

That investment banker has really earned its fees; the business has never made a profit, as far as I know, it has only 23 MEUR revenues and it is in low margin wholesale business.

This is significant because it’s the news that I have basically been waiting since 2015. It was basically the last problem child in Apetit’s core operating portfolio.

Now Apetit’s concern structure is pretty clean and it’s left with profitable Frozen Food business, profitable Vegetable Oil business and temporarily unprofitable Grain Trading business.

Last two years have had bad crops in Finland which has ruined the Grain Trading’s results. Normal year should command 1-2 MEUR EBIT.

Vegetable Oil produces oils for food industry and is consistently profitable with 2 MEUR EBIT. This seems to be the crown jewel, although it lacks growth.

My very far-off wild idea for the Vegatable Oil business is that the new grain protein ingredient could shift the market perception to Beyond Meat or equivalent, on back of the hot vegan food trend.

Probably, though, it’s just another raw material for food industry with some margin improvement potential, but you can always dream.

Question is that how much the remaining Frozen Food business makes profit. In 2015, as independent subsidiary, it made 4,5 MEUR EBIT with 46,7 MEUR revenue. Management says that it’s currently growing double digit with new products and focus on vegan products.

To make an estimate of the current run-rate EBIT one should make the following adjustments for the 4,5 MEUR EBIT in 2015:

1) add the incremental profit from growth since 2015 (unknown)

2) deduct concern cost (say 1 MEUR), increased R&D spend (unknown) and increased depreciation from capex (unknown).

My guess is that the current run rate EBIT is 2-4 MEUR.

Using 10x valuation multiple for the “normalized” concern EBIT you get 50-80 MEUR enterprise value for the business:

I have adjusted the net debt for incremental cash from the Fresh Food sale (13,8 MEUR) and decrease of excess inventory in the Grain trading business (20 MEUR).

(The year end 2018 inventories were 40 MEUR higher than in 2017 due to the exceptionally bad crop year and management communicated that it will normalize. The 20 MEUR adjustment approximates the change in net working capital for 2018 and that year end net debt is typically negative.)

The Sucros JV I have valued @0,5-1,0x book because it’s currently making losses. The Fresh Food business sale, and Fish business sale earlier, indicates that the transaction values could be higher too.

The coming half year report should reveal the true profitability of the remaining Frozen Food businesses and that pretty much defines whether valuation is towards the low or high side in the valuation sheet.

If we get positive surprise there should be nice upside. If it’s not good, I see limited downside. Second tries usually don’t work but I’ll try it anyway.

Disclosures: Back in Apetit as of today with 5 % position.

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One thought on “Investment journal 10.7.2019: Back to Apetit

  1. Reader sent me a question of where did I get the 4,5 MEUR EBIT for the Frozen Food business (Old Apetit Ruoka Oy).

    This might interest some other people too and here’s my answer:

    Yeah Frozen Food is Apetit Ruoka Oy, but to be specific “old” Apetit Ruoka Oy, that was merged to “new Apetit Ruoka Oy” in 2016 and thus no longer exist.

    The annual reports for the old non-existing Apetit Ruoka Oy, which consists the Frozen Food business, can how ever be bought from here (published register of all companies in Finland): https://t.co/OptsSxOPeq

    I have published the summary numbers in this post:

    https://t.co/73lwpvhysd

    Because the company doesn’t exists anymore, google won’t bring you the summary accounts from commercial data providers, at least I haven’t found them (for example https://t.co/XR8o5Ii12c)

    (Note: I got the numbers from data provider which sources their data from the public register we use in work so I haven’t looked the official documents, with few exceptions, by myself).

    As said, they changed the concern structure in 2016, so for example if you go to https://t.co/SwGwcyLiUH ,it shows numbers of the “new” Apetit Ruoka Oy.

    The “new” Apetit Ruoka Oy is originaly the old Caternet Oy, i.e the just sold Fresh Food busines, up to 2015 (see the ~20 MEUR revenues in 2015).

    After 2015 changes in the concern structure, the “new” Apetit Ruoka Oy consisted of Frozen Food (“old” Apetit Ruoka Oy), Fresh Food (the old Caternet Oy which became the “new” Apetit Ruoka Oy) and Service desks (the mergers explain the revenue growth, if you opened the link).

    Now after the sales, the new Apetit Ruoka Oy consists only of the Frozen Food business. And when the new numbers get published, we will know how profitable the Frozen Food business actually is. My guestimate is that it’s 2-4 MEUR, but really it can be anything.

    Like

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