La Doria — Investing for the future

Consumer

La Doria

Investing for the future

FY17 results

Food & beverages

3 April 2018

Price	€12.28
Market cap	€381m

Net debt (€m) at 31 December 2017		98.1

Shares in issue	31.0m
Free float	37%
Code	LD

Primary exchange	Borsa Italia (STAR)
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(3.3)	(23.8)	24.4
Rel (local)	(7.6)	(26.5)	16.8

52-week high/low

€17.5

€9.8

Business description

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

Next events

Q118 results	15 May 2018
AGM	8 June 2018
H118 results	13 September 2018
9M18 results	13 November 2018

Analysts

Sara Welford	+44 (0)20 3077 5700
Paul Hickman	+44 (0)20 3681 2501

consumer@edisongroup.com

Edison profile page

La Doria is a research client of Edison Investment Research Limited

The environment remains challenging, but La Doria has posted a robust set of FY17 results. The company has announced its updated three-year rolling industrial plan, and as part of this there will be a major investment plan to expand capacity while streamlining the business to reduce costs. The result should be an expansion of the higher margin lines, allowing the company to drive revenue growth by increasing volumes, while also structurally improving margins in the longer term. We adjust our forecasts to reflect the investment plan and the competitive environment, hence trimming our near-term sales and EBITDA forecasts, while increasing our net debt assumptions. Our fair value moves to €16.10 from €16.90.

Year end	Revenue (€m)	PBT* (€m)	EPS* (c)	DPS (c)	P/E (x)	Yield (%)
12/16	653.1	37.3	108.8	18.0	11.3	1.5
12/17	669.1	39.7	98.1	23.0	12.5	1.9
12/18e	689.2	42.2	99.3	24.0	12.4	1.9
12/19e	709.8	45.5	107.1	25.0	11.5	2.0

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

Solid FY17 results

Group results were impressive, with organic growth of 6.2%. This was mainly driven by volume growth in the sauces and vegetable lines. Group EBITDA margin also improved, despite the competitive backdrop and management’s previous expectation that it would contract. The tomato-based products and fruit lines remained under pressure as a result of the challenging competitive environment in those segments.

Investing for the future

Given the increasingly challenging competition in the markets and segments in which La Doria operates, the board is implementing an investment plan with the primary objective of improving revenues and margins by driving up volumes of its higher value-added products. In addition, cost reductions will be targeted by restructuring existing industrial sites, extending and automating warehouses, and improving the efficiency of its logistics. The plan involves capital expenditure of €115m over the period FY18-21, which also includes an expansion of capacity to cover the planned increase in volume.

Valuation: €16.10 per share

Based on our forecasts, our DCF model points to a fair value of €16.10 per share (from €16.90), or c 30% upside from the current share price. La Doria trades on 12.4x FY18e P/E, a c 20% discount to its private-label peer group, while on 8.1x FY18e EV/EBITDA, it trades at a c 10% discount to the peer group. We note our fair value would be €17.85 if our WACC moved down 40bps to 6.0%. We believe La Doria remains an attractive proposition given the strength of its market position in the private-label segment, and management’s commitment to improve the stability and visibility of the business by reducing reliance on the more volatile tomato line.

FY17 financial results

Consolidated revenues were up 2.4% to €669.1m year-on-year, or +6.2% at constant currency. EBITDA was up 6.7% to €60.1m, with the EBITDA margin up 40bp to 9.0%. EBIT was up 4.3% to €41.6m, with the margin flat at 6.2%. Net debt was €98.1m vs €104.8m at the end of FY16 and €68.7m at the end of 9M17.

Business update

FY17 results were both ahead of our forecasts and management’s targets.

Exhibit 1: Forecast vs actual FY17 results (€m)

	Forecast	Actual	% chg
Revenue	666.2	669.1	0.4%
EBITDA	52.8	60.1	14.0%
EBIT	39.8	41.6	4.7%
PBT	37.8	39.7	5.3%
Net profit	27.9	30.4	8.9%
Net debt	98.6	98.1	-0.5%

EBITDA margin	7.9%	9.0%	1.1%
EBIT margin	6.0%	6.2%	0.3%

Source: Edison Investment Research, Company data

Volumes in the sauces and pulses and vegetables segments were stronger, and margins were higher, despite lower selling prices and also some raw material cost inflation. The margin improvement was mainly driven by operating leverage. The UK subsidiary, LDH, also delivered significantly improved revenues. These were caused by the combined effect of substantial volume growth and rising prices, the latter stemming from inflationary effects caused by sterling weakness. Margins within LDH contracted slightly due to continued pressure from the major UK retailers.

The tomato-based products line was stable at constant currency, and the fruit line was down 5.2% on the same basis. These were both affected by the contraction of the Italian market.

Forecasts

La Doria has published an updated three-year industrial plan, which details an investment plan to strengthen the business in the long term. The strategy centres on driving revenues through increases in capacity in the more value-added lines (including premium and organic segments, and increasing the geographic reach of the business), also resulting in a mix improvement that should increase EBITDA margins. In addition, the investment plan should lead to expansion in production capacity and streamlined production to reduce costs.

Exhibit 2: Old vs new financial targets

€m	2018e			2019e
	Old	New	% chg	Old	New	% chg
Revenue	690.2	689	(0.2%)	709.3	712	0.4%
EBITDA	59.2	58	(2.0%)	63.5	65	2.4%
EBIT	46.4	43	(7.3%)	50.8	48	(5.5%)
PBT	43.0	41	(4.7%)	48.6	46	(5.3%)
Net profit	31.7	30	(5.4%)	36	34	(5.6%)

Operating cash flow	36.8	51.0	38.6%	44.9	45.0	0.2%
Capex	12.5	61.0	388.0%	13.0	28.0	115.4%
FCF	24.3	(10.0)	(141.2%)	31.9	17.0	(46.7%)
Dividend payout (on parent company profit)	30%	30%		30%	30%
Net cash flow	18	23	27.8%	20.7	3	(85.5%)
Net debt	77	121	57.1%	56.3	117	107.8%
Debt/EBITDA	1.3	2.1	61.5%	0.9	1.8	100.0%
Gearing	0.3	0.5		0.2	0.4
ROI	14.3%	11.6%	(270)	15.4%	12.4%	(300)
ROE	12.8%	12.2%	(60)	13.2%	12.6%	(60)

Source: Company data

We trim our near-term forecasts to reflect the updated Industrial Plan and the challenging competitive environment. Our revenue forecasts reduce by 1% and our EBITDA falls by a larger amount as we assume the environment gets tougher, particularly in the UK market where manufacturers continue to come under pressure from the food retailers, especially in the private label space in which La Doria operates. Our FY19 EBITDA forecast is now closer to that forecast by management as the consumer backdrop in La Doria’s main markets continues to be challenging, and some raw material costs are continuing to rise. The capital investment planned will result in significantly higher net debt, although we note the gearing level remains comfortable and net debt/EBITDA will peak at 2.1x in FY18. The new investment should ensure La Doria is well placed to compete in a tough environment by becoming one of the lowest-cost operators, with fully automated warehouses and streamlined production.

Exhibit 3: Old vs new forecasts (€m)

	2018e			2019e
	Old	New	% chg	Old	New	% chg
Revenue	696.2	689.2	-1.0%	717.1	709.8	-1.0%
EBITDA	60.7	59.2	-2.5%	69.7	64.5	-7.5%
EBIT	48.2	44.2	-8.4%	57.2	47.5	-17.0%
PBT	44.7	42.2	-5.7%	53.7	45.5	-15.3%
Net profit	32.6	30.8	-5.7%	39.2	33.2	-15.3%
Net debt	79.3	119.8	51.1%	55.0	114.7	108.6%

Source: Edison Investment Research

Valuation

La Doria’s share price has outperformed the broader market over the last 12 months, as it recovered from the underperformance during 2016. Over the past three months, however, La Doria is down 25% compared to a 1% increase in the FTSEMIB index, as the share price hit all-time highs following the 9M17 results, and subsequently reversed part of the substantial outperformance. On 2018 estimates, La Doria trades on 12.4x P/E, which is at a discount of c 20% versus the peer group of private-label and small-cap food manufacturers on 16.2x P/E. On EV/EBITDA, La Doria trades on 8.1x, which is at a c 10% discount to its peer group.

Exhibit 4: Benchmark valuation of La Doria relative to peers

		P/E (x)		EV/EBITDA (x)		Dividend yield (%)
	Market cap (m)	2018e	2019e	2018e	2019e	2018e	2019e
Greencore	£898.7	8.7	8.0	6.6	6.0	4.3%	4.6%
Ebro Foods	€ 3,163.5	16.7	15.7	10.0	9.3	3.2%	3.4%
Parmalat	€ 5,546.9	24.9	21.4	9.3	8.2	0.6%	0.6%
Bonduelle	€ 1,092.7	14.6	12.4	7.9	7.0	1.4%	1.6%
Valsoia	€163.5	N/A	18.6	12.3	10.0	1.4%	1.6%
Peer group average		16.2	15.2	9.2	8.1	2.2%	2.3%
La Doria	€ 380.7	12.4	11.5	8.1	7.4	1.9%	2.0%
Premium/(discount) to peer group		-23.7%	-24.5%	-12.2%	-8.3%	-10.8%	-13.3%

Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 2 April 2018.

Our primary valuation methodology is DCF analysis and, based on our updated forecasts, we calculate a fair value of €16.10/share (from €16.90/share), or c 30% upside from the current levels. This is based on our assumptions of a 1.5% terminal growth rate and a terminal EBIT margin of 8.0%. We have raised our terminal EBIT margin assumption from 7.5% to 8.0% in light of the new industrial plan and its intent to structurally improve La Doria’s EBIT margin in the long term.

Our WACC of 6.4% is based on an equity risk premium of 4%, a borrowing spread of 5% and beta of 0.8. Below, we show a sensitivity analysis of these assumptions and note that based on our model the current share price is discounting a terminal EBIT margin of c 6.6% (which compares to La Doria’s reported EBIT margin of 8.1% in 2015, 6.1% at the trough in 2016, and 6.2% in 2017) and a terminal growth rate of 1.0%.

Exhibit 5: DCF sensitivity to terminal growth rate and EBIT margin (€ per share)

Terminal growth rate		EBIT margin
			6.5%	7.0%	7.5%	8.0%	8.5%	9.0%
	-2.5%		8.5	9.1	9.6	10.2	10.7	11.3
	-1.5%		9.2	9.8	10.5	11.1	11.7	12.4
	-0.5%		10.1	10.8	11.5	12.3	13.0	13.7
	0.5%		11.3	12.1	13.0	13.9	14.7	15.6
	1.5%		12.9	14.0	15.0	16.1	17.1	18.2
	2.5%		15.5	16.8	18.1	19.4	20.8	22.1
	3.5%		19.7	21.5	23.3	25.1	26.9	28.7

Source: Edison Investment Research estimates

We also illustrate the sensitivity to WACC. We note that with a WACC of 6.0% and leaving our terminal growth rate assumption unchanged at 1.5%, our fair value would move up to €17.85.

Exhibit 6: DCF sensitivity to WACC and terminal growth rate (€ per share)

WACC		Terminal growth rate
			0.5%	1.0%	1.5%	2.0%	2.5%	3.0%
	8.5%		9.39	9.86	10.39	11.00	11.71	12.56
	8.0%		10.24	10.79	11.42	12.16	13.04	14.09
	7.5%		11.21	11.87	12.63	13.54	14.63	15.96
	7.0%		12.32	13.12	14.06	15.19	16.56	18.29
	6.5%		13.62	14.60	15.77	17.20	18.98	21.28
	6.0%		15.16	16.37	17.85	19.70	22.08	25.26
	5.5%		17.00	18.53	20.45	22.92	26.22	30.82
	5.0%		19.24	21.24	23.80	27.21	31.99	39.16
	4.5%		22.05	24.71	28.25	33.21	40.65	53.05
	4.0%		25.65	29.33	34.47	42.19	55.06	80.80

Source: Edison Investment Research estimates

Exhibit 7: Financial summary

€m	2015	2016	2017	2018e	2019e	2020e
December	IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue	748.3	653.1	669.1	689.2	709.8	731.1
Cost of Sales	(616.9)	(545.4)	(555.7)	(575.1)	(589.6)	(604.3)
Gross Profit	131.5	107.8	113.4	114.0	120.3	126.8
EBITDA	77.6	56.3	60.1	59.2	64.5	70.1
Operating Profit (before amort. and except.)	61.0	39.9	41.6	44.2	47.5	53.1
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)	3.6	8.9	0.2	0.0	0.0	0.0
Operating Profit	64.6	48.8	41.8	44.2	47.5	53.1
Net Interest	(3.6)	(2.7)	(1.9)	(2.0)	(2.0)	(2.0)
Profit Before Tax (norm)	57.4	37.3	39.7	42.2	45.5	51.1
Profit Before Tax (FRS 3)	61.0	46.2	39.9	42.2	45.5	51.1
Tax	(16.1)	(12.4)	(9.5)	(11.4)	(12.3)	(13.8)
Profit After Tax (norm)	44.8	33.7	30.4	30.8	33.2	37.3
Profit After Tax (FRS 3)	44.8	33.7	30.4	30.8	33.2	37.3

Average Number of Shares Outstanding (m)	31.0	31.0	31.0	31.0	31.0	31.0
EPS - normalised fully diluted (c)	144.6	108.8	98.1	99.3	107.1	120.3
EPS - (IFRS) (c)	144.6	108.8	98.1	99.3	107.1	120.3
Dividend per share (c)	28.0	18.0	23.0	24.0	25.0	26.0

Gross Margin (%)	17.6	16.5	16.9	16.5	16.9	17.3
EBITDA Margin (%)	10.4	8.6	9.0	8.6	9.1	9.6
Operating Margin (before GW and except.) (%)	8.1	6.1	6.2	6.4	6.7	7.3

BALANCE SHEET
Fixed Assets	177.6	173.3	174.0	220.0	236.0	246.1
Intangible Assets	10.6	10.0	6.1	5.4	4.7	4.0
Tangible Assets	143.3	143.9	149.9	196.6	208.3	206.0
Investments	23.7	19.4	18.0	18.0	23.0	36.1
Current Assets	398.8	367.8	394.2	358.9	372.1	402.1
Stocks	199.8	187.0	209.5	195.5	200.4	205.5
Debtors	107.7	103.9	106.5	106.8	110.0	113.3
Cash	77.9	62.8	66.7	45.0	50.1	71.8
Other	13.3	14.2	11.5	11.5	11.5	11.5
Current Liabilities	(220.7)	(187.9)	(209.8)	(200.5)	(203.2)	(205.9)
Creditors	(129.3)	(126.4)	(142.1)	(132.9)	(135.5)	(138.3)
Short term borrowings	(91.4)	(61.5)	(67.6)	(67.6)	(67.6)	(67.6)
Long Term Liabilities	(157.3)	(144.5)	(131.5)	(120.7)	(114.1)	(114.1)
Long term borrowings	(116.6)	(106.1)	(97.2)	(97.2)	(97.2)	(97.2)
Other long term liabilities	(40.7)	(38.3)	(34.3)	(23.5)	(16.8)	(16.8)
Net Assets	198.4	208.8	227.0	257.8	291.0	328.3

CASH FLOW
Operating Cash Flow	58.2	65.7	39.9	52.1	46.8	50.7
Net Interest	(3.6)	(2.7)	(1.9)	(2.0)	(2.0)	(2.0)
Tax	0.0	0.0	0.0	0.0	0.0	0.0
Capex	(8.4)	(13.0)	(18.7)	(61.0)	(28.0)	(14.0)
Acquisitions/disposals	(4.9)	0.0	0.0	0.0	0.0	0.0
Financing	0.0	0.0	0.0	0.0	0.0	0.0
Dividends	(9.3)	(8.4)	(7.6)	(10.8)	(11.6)	(13.1)
Other	(23.3)	(16.3)	(5.2)	0.0	0.0	0.0
Net Cash Flow	8.7	25.3	6.6	(21.7)	5.1	21.7
Opening net debt/(cash)	138.2	130.1	104.8	98.1	119.8	114.7
HP finance leases initiated	0.0	0.0	0.0	0.0	0.0	0.0
Other	(0.6)	(0.1)	0.1	0.0	(0.0)	0.0
Closing net debt/(cash)	130.1	104.8	98.1	119.8	114.7	93.0

Source: Edison Investment Research, company data

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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