Another strong year

La Doria 2 March 2016 Update

La Doria

Another strong year

FY15 results

Food & beverages

2 March 2016

Price

€12.20

Market cap

€378m

Net debt (€m) at December 2015

129.4

Shares in issue

31.0m

Free float

36%

Code

LD

Primary exchange

Borsa Italia (STAR)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.6

(5.9)

5.3

Rel (local)

10.6

19.7

29.9

52-week high/low

€16.4

€8.9

Business description

La Doria is the leading manufacturer of private-label preserved vegetables and fruit for the Italian (20% revenues) and international (80% revenues) markets. It enjoys leading market-share positions across its product ranges in the UK and Italy.

Next events

Annual report

11 March 2016

Q116 results

12 May 2016

AGM

14-16 June 2016

H116 results

29 August 2016

Analysts

Sara Welford

+44 (0) 20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

La Doria is a research client of Edison Investment Research Limited

La Doria has reported yet another strong set of results. The updated three-year plan provides strategic continuity. As previously highlighted, due to the unfounded fears of tomato overproduction at the start of the campaign, lower sales prices were achieved for new contracts. Following the FY results and updated business plan, we have cut our sales forecasts to reflect the lower 2016 base, left our EBITDA forecasts broadly unchanged, and increased our PBT and net profit estimates in line with the new guidance.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

631.4

44.0

80.5

22.0

16.0

1.7

12/15

748.3

61.0

140.6

25.0

9.1

1.9

12/16e

684.7

51.8

116.9

26.0

11.0

2.0

12/17e

718.9

57.6

130.1

27.0

9.9

2.1

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Strong full-year results

EBITDA came in at €77.5m, a 10% beat versus our forecast and the company’s own target. This implies an even greater level of outperformance for Q4, with EBITDA over double our forecast. All other P&L metrics beat both our forecasts and company targets. The acquisition of Pa.fi.al contributed around half the growth in net profit, but the base business also performed well. We have upgraded our group net profit forecasts for 2016 and 2017 by c 27%, as a result of lower tax charges, but mainly due to a change of accounting treatment for minorities. Our EBITDA forecasts remain broadly unchanged. We have rolled forward our model to 2018; our profit forecasts are broadly in line with the company targets.

New three-year plan gives continuity

Together with the FY results, La Doria published a new rolling three-year strategic and financial plan. The strategic objectives remain broadly unchanged: the main priority is to expand the higher margin and less volatile parts of the business to reduce the dependence on the more unpredictable ‘red line’. There is a new target to develop the US market, which is a natural evolution of the strategy given the company’s presence in the US, albeit small. The financial targets represent a small upgrade at the net profit level in relation to the previous three-year rolling plan.

Valuation: Continues to be attractive

Based on our updated forecasts, our DCF model points to a fair value of €15.85 per share, or 23% upside from the current share price. Despite significant share price outperformance relative to the FTSE MIB over the past three, six and 12 months, we calculate that La Doria still trades at a sharp discount to its peer group of private label and small-cap food manufacturers, which we view as unwarranted. We believe it continues to be an attractive proposition, especially given the strength of its market positions within the private label segment.

Updated rolling three-year plan provides continuity

La Doria outlines its financial targets and strategic business plan for a rolling three-year period, usually at the beginning of each financial year.

The new financial targets are mostly below those set out last year, as illustrated in Exhibit 1 below. The lower sales prices for new contracts (negotiated in summer 2015 with validity from 2016) are to blame for the reduction in sales targets. That said, it is testament to management’s commitment to stem the volatility of the business and to reduce the overall dependence on the ‘red line’ that a larger cut to the top line is mitigated throughout the P&L and the net profit targets (pre-minorities) are broadly unchanged. Net profit targets (pre-minorities) benefit from a lower forecast tax rate, and at the group level the main benefit stems from eliminating minority interests. La Doria increased its stake in the UK subsidiary, La Doria Holding (LDH), from 51% to 57.9% in Q315. More importantly, the LDH shareholder agreement was reviewed and updated. This has led to a change in the accounting treatment of the minorities: La Doria now consolidates 100% of its minorities, and treats as debt the value of the put options that exist against it. We note, therefore, that net debt of €129.4m at end FY15 is – in underlying terms – significantly better than our forecast, as it includes a liability of €28.4m relating to the put option liability. Our forecast of €125.4m excluded the put options. Cash flow in FY15 was therefore significantly better than expected.

Exhibit 1: Current vs prior company financial targets (2016-17e)

2016e

2017e

€m

Old

New

% chg

Old

New

% chg

Revenue

750.0

685.4

-8.6%

777.0

722.5

-7.0%

EBITDA

74.3

68.4

-7.9%

79.3

72.9

-8.1%

EBIT

59.9

55.3

-7.7%

64.9

60.1

-7.4%

PBT

55.8

52.1

-6.6%

61.2

57.3

-6.4%

Net profit (pre minorities)

36.7

36.8

0.3%

40.5

41.2

1.7%

Group net profit

32.2

36.8

14.3%

35.7

41.2

15.4%

Net debt

105.8

110.4

4.3%

81.1

86.9

7.2%

EBITDA margin (%)

9.9%

10.0%

0.1%

10.2%

10.1%

-0.1%

EBIT margin (%)

8.0%

8.1%

0.1%

8.4%

8.3%

0.0%

Source: Company data

La Doria’s strategic objectives remain broadly the same, thus giving the business a solid level of continuity. The new three-year plan provides an additional explicit objective to develop the US market, where the company already has a presence, albeit small. The objectives to grow the ready-made sauces market and develop new markets such as the US and the emerging markets tie in with the overarching objective of reducing the volatility and seasonality of the business and improving visibility through the development of higher value added, margin-enhancing products. We note new products include soups, minestrones and enriched baked beans, which have all made a promising start.

The business plan also provides an updated view of the private label (PL) and Made in Italy markets. La Doria believes the structural long-term trend of PL growth at the expense of secondary and tertiary brands will continue. Countries with established PL markets should continue to see growth owing to two main trends: continued innovation by supermarkets and growth of discounters. Specifically, management believes supermarkets will increasingly focus on quality and the higher end, with greater attention paid to ethical and environmental considerations and product safety. Management also expects a shift away from a focus solely on costs, as the low price private label segment is now contracting. In Italy the PL market share remains among the lowest in Europe, providing a low base for growth. Overall, the company believes the PL market should continue to become more sophisticated, with increased innovation and segmentation at the premium/organic end. On the Made in Italy front, demand for typical Italian food products continues to grow, and all of La Doria’s categories are witnessing export growth.

Valuation

La Doria’s share price has significantly outperformed over the last three months. It is down 3.6% vs the MIB, which is down 21.6%. Despite this, on 2016 estimates La Doria trades on 11.0x P/E and 7.9x EV/EBITDA, with a 1.9% dividend yield. This compares to the peer group of private-label and small-cap food manufacturers on 18.7x and 10.4x, or a discount of c 40% and c 25% respectively, which we believe is unwarranted.

Exhibit 2: Benchmark valuation of La Doria relative to peers

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

Market cap (m)

2016e

2017e

2016e

2017e

2016e

2017e

Greencore

£1,538.2

19.1

17.0

13.7

12.1

1.8%

2.1%

Ebro Foods

€ 3,003.5

18.0

16.6

10.4

9.6

3.3%

3.6%

Parmalat

€ 4,474.5

23.4

19.9

9.1

7.9

0.9%

1.0%

Bonduelle

€ 803.5

12.1

11.2

6.9

6.3

1.8%

1.9%

Valsoia

€ 213.5

20.8

18.6

11.8

10.6

1.5%

1.6%

Peer group average

18.7

16.7

10.4

9.3

1.9%

2.0%

La Doria

€ 398.4

11.0

9.9

7.9

7.3

2.0%

2.1%

Premium/(discount) to peer group

-41.2%

-40.8%

-24.0%

-21.1%

9.1%

4.9%

Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 29 February 2016.

We have also rolled forward our DCF to 2016 and calculate a fair value of €15.85, or 23% upside from the current level. This is based on our assumptions of a 1.5% terminal growth rate, a 9.0% terminal EBITDA margin and a beta of 0.8, giving a WACC of 6%. Below we show a sensitivity analysis to these assumptions and note that the current share price is discounting a terminal EBITDA margin of 7.5% and a terminal growth rate of 0%.

Exhibit 3: DCF sensitivity to terminal growth rate and EBTIDA margin (€ per share)

Terminal growth

EBITDA margin

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

-2.0%

7.5

8.7

9.9

11.1

12.3

13.5

-1.0%

8.1

9.5

10.9

12.3

13.6

15.0

0.0%

9.0

10.6

12.2

13.8

15.4

17.0

1.0%

10.1

12.0

13.9

15.8

17.8

19.7

2.0%

11.7

14.1

16.5

18.9

21.2

23.6

3.0%

14.3

17.4

20.5

23.6

26.7

29.9

4.0%

19.0

23.5

27.9

32.4

36.8

41.3

Source: Edison Investment Research estimates

Key sensitivities

La Doria’s key sensitivities include:

input cost inflation on the agricultural commodities it processes to manufacture its products;

the supply/demand balance affecting the achievability of finished goods price inflation;

consumer consumption patterns and competitive pressures, particularly in Europe with a subdued economic environment, although La Doria and PL in general should benefit from any consumer down trading; and

foreign exchange, specifically euro/sterling due to the consolidation of its trading subsidiary LDH.

Exhibit 4: Financial summary

€m

2013

2014

2015

2016e

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

604.4

631.4

748.3

684.7

718.9

762.1

Cost of Sales

(521.2)

(527.6)

(617.1)

(568.1)

(595.8)

(630.7)

Gross Profit

83.2

103.8

131.2

116.6

123.2

131.3

EBITDA

 

 

43.4

60.0

77.5

68.2

73.0

78.9

Operating Profit (before amort. and except.)

31.3

48.1

61.0

54.8

60.6

66.5

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

FX gain / (loss)

2.5

0.3

0.0

0.0

0.0

0.0

Operating Profit

33.8

48.4

61.0

54.8

60.6

66.5

Net Interest

(4.7)

(4.1)

0.0

(3.0)

(3.0)

(3.7)

Profit Before Tax (norm)

 

 

26.6

44.0

61.0

51.8

57.6

62.8

Profit Before Tax (FRS 3)

 

 

29.2

44.3

61.0

51.8

57.6

62.8

Tax

(7.9)

(14.3)

(17.4)

(15.5)

(17.3)

(18.8)

Profit After Tax (norm)

19.7

29.9

43.6

36.2

40.3

44.0

Profit After Tax (FRS 3)

21.2

29.9

43.6

36.2

40.3

44.0

Group Net Profit (norm)

14.0

25.0

43.6

36.2

40.3

44.0

Average Number of Shares Outstanding (m)

29.5

30.6

31.0

31.0

31.0

31.0

EPS - normalised fully diluted (c)

 

 

45.1

80.5

140.6

116.9

130.1

141.9

EPS - (IFRS) (c)

 

 

52.5

81.5

140.6

116.9

130.1

141.9

Dividend per share (c)

12.0

22.0

25.0

26.0

27.0

28.0

Gross Margin (%)

13.8

16.4

17.5

17.0

17.1

17.2

EBITDA Margin (%)

7.2

9.5

10.4

10.0

10.2

10.4

Operating Margin (before GW and except.) (%)

5.2

7.6

8.2

8.0

8.4

8.7

BALANCE SHEET

Fixed Assets

 

 

114.8

179.6

189.8

187.4

185.5

183.6

Intangible Assets

4.0

10.6

10.0

9.3

8.6

7.9

Tangible Assets

98.9

146.6

139.2

137.5

136.3

135.1

Investments

11.9

22.3

40.6

40.6

40.6

40.6

Current Assets

 

 

336.1

374.0

347.9

361.0

398.9

441.0

Stocks

194.1

212.9

216.0

217.0

227.6

236.5

Debtors

89.0

100.3

112.2

106.1

111.4

118.1

Cash

27.9

41.1

0.0

18.3

40.3

66.8

Other

25.1

19.6

19.6

19.6

19.6

19.6

Current Liabilities

 

 

(214.8)

(229.1)

(270.3)

(253.9)

(259.7)

(266.9)

Creditors

(129.2)

(143.7)

(166.7)

(150.3)

(156.1)

(163.3)

Short term borrowings

(85.7)

(85.4)

(103.6)

(103.6)

(103.6)

(103.6)

Long Term Liabilities

 

 

(82.8)

(136.6)

(68.4)

(54.9)

(39.4)

(39.4)

Long term borrowings

(50.7)

(93.9)

(25.8)

(25.8)

(25.8)

(25.8)

Other long term liabilities

(32.1)

(42.6)

(42.6)

(29.1)

(13.6)

(13.6)

Net Assets

 

 

153.3

187.9

199.0

239.6

285.3

318.3

CASH FLOW

Operating Cash Flow

 

 

23.3

53.7

68.1

41.4

45.6

51.7

Net Interest

(4.7)

(4.1)

0.0

(3.0)

(3.0)

(3.7)

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Capex

(9.1)

(17.2)

(8.5)

(11.0)

(10.5)

(10.5)

Acquisitions/disposals

0.0

(64.8)

(38.7)

0.0

0.0

0.0

Financing

0.0

0.0

0.0

0.0

0.0

0.0

Dividends

(4.4)

(6.3)

(12.2)

(9.1)

(10.1)

(11.0)

Other

2.8

8.6

0.0

0.0

0.0

0.0

Net Cash Flow

8.0

(30.2)

8.7

18.4

22.0

26.5

Opening net debt/(cash)

 

 

118.0

108.5

138.2

129.4

111.0

89.0

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

1.5

0.5

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

108.5

138.2

129.4

111.0

89.0

62.5

Source: Edison Investment Research, La Doria data

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