La Doria — Update 21 November 2016

Consumer

La Doria

A tough environment

Q316 results

Food & beverages

21 November 2016

Price	€7.37
Market cap	€228m

Net debt (€m) at 30 September 2016		89.2

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	(3.9)	(33.7)	(42.0)
Rel (local)	0.1	(32.1)	(22.7)

52-week high/low

€13.33

€7.10

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, Italy, Germany, and Australia

Next events

FY16 results

March 2017

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

As outlined at the time of the H1 results, La Doria’s operating environment remains tough, with significant deflation on the sales side and raw material inflation on the cost side. The effects of a difficult 2016 tomato campaign are still feeding through, and the devaluation of sterling is unhelpful as it may cause a loss of competitiveness in the vegetable line vis-à-vis British domestic producers. Management expects a recovery from mid-2017, when the new tomato campaign will start to come through.

Year end	Revenue (€m)	PBT* (€m)	EPS* (c)	DPS (c)	P/E (x)	Yield (%)
12/15	748.3	61.0	144.6	28.0	5.1	3.8
12/16e	654.8	43.1	97.3	21.0	7.6	2.8
12/17e	661.3	35.2	79.5	17.0	9.3	2.3
12/18e	701.0	45.3	102.2	24.0	7.2	3.3

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

Nine-month results

In Q3, La Doria witnessed a continuation of the trends seen in H1, specifically a deflationary trading environment and weakening of sterling. In addition, cost inflation started to feature. As outlined in the recent three-year business plan, management expects 2016 to be weaker than 2015, followed by a further weakening in 2017 before the recovery starts to come through. This should commence in H217 following a better 2017 tomato campaign over the summer (a drop in southern Italian tomato production in 2016 bodes well for 2017 pricing), and should come through fully in the 2018 numbers.

Mitigating the downturn

Despite the tough environment, La Doria is continuing to implement its strategy and improve efficiencies to contain costs. La Doria’s strategy is to grow the higher added-value product categories such as ready-made sauces and soups to reduce the overall exposure of the group to the volatility in the tomato-based product line. Management remains committed to this objective, which is sensible in our view, and has indeed insulated the company from a more significant downturn: the profit contribution from the tomato line has steadily reduced over the years as management has expanded the other parts of the business.

Valuation: Significant potential

Our forecasts remain unchanged and our DCF model points to a fair value of €10.99 per share (€10.91 previously), or 49% upside from the current share price. We calculate that La Doria now trades on 9.3x 2017e P/E and 7.2x 2017e EV/EBITDA, at c 44% and c 14% respective discounts to its private-label peer group.

Financial results and forecasts

Business update

During the first nine months of 2016, La Doria has experienced the effects of the 2015 tomato campaign – which affected H1 results and caused a significant contraction in finished product sales prices, only partly offset by lower costs – in addition to the initial effects of the 2016 campaign, which witnessed a further reduction in selling prices. In the ready-made sauces segment costs remained stable, but pricing was also down. LDH, the UK subsidiary, was affected by deflation in selling prices, although effective cost control and improved efficiency resulted in stable margins. Furthermore, group results were affected by sterling devaluation relating to the consolidation of LDH.

Given that the majority of the negotiations for the red line occur during Q3, there is good visibility on the business for the next 12 months. For the fruit and vegetables/pulses lines, the contracts are mainly negotiated during Q4 and we therefore now also have good visibility for the next 12 months: deflation remains a feature across the board, and harvests have tended to be lower, hence costs have been higher.

Sterling devaluation

It is still early days to judge the long-term impact of Brexit on consumption patterns. However, the immediate effect was the significant devaluation of sterling. As a reminder, La Doria derives c 50% of its revenue from the UK. Of course, the competition will also encounter higher raw material costs as a function of their euro denomination, but UK-based competitors in the vegetable category will have the advantage of having some sterling-denominated costs to mitigate the impact, while LDH (La Doria) Ltd (LDH) is a trading company and the majority of costs are euro-denominated. For the red line all producers face the same headwinds so there is no loss of competitiveness. As a reminder, La Doria now consolidates 100% of its minorities and treats as debt the value of the put options that exist against it.

9M16 results

Consolidated revenues were down 13% to €491.6m given the lower selling prices across the board and the deflationary economic environment. EBITDA was down 24% to €44.9m, with the EBITDA margin down 150bp to 9.0%. EBIT was down 32% to €32.6m, with the EBIT margin down 200bp to 6.6%. Net debt was €89.2m vs €130m at the end of FY15 and €81.9m at the end of H116.

Forecasts

We leave our forecasts unchanged. We note 2017 is expected to be a trough year in respect of margins, implying some recovery in the 2017 contract negotiation, which should mainly affect 2018 results.

Valuation

La Doria’s share price has significantly underperformed over the last three and six months, mostly due to the devaluation of sterling following the Brexit vote, but also due to the weak macroeconomic environment and the tough 2016 tomato campaign. Over the past three months, La Doria is down 35% compared to a 1.1% decline in the FTSE Italia index. Despite this, on 2017 estimates, La Doria trades on 9.3x P/E and 7.2x EV/EBITDA, with a 2.3% dividend yield. This compares to the peer group of private-label and small-cap food manufacturers on 16.6x and 8.4x, or a discount of c 44% and c 14% respectively, which we believe is unwarranted.

Exhibit 1: 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	£1,326.7	14.9	13.7	10.8	9.6	2.3	2.6
Ebro Foods	€2,910.4	17.1	16.0	9.7	9.0	3.4	3.6
Parmalat	€4,567.3	30.0	24.6	9.4	8.3	0.8	0.8
Bonduelle	€721.6	12.5	10.6	6.6	5.8	2.0	2.1
Valsoia	€177.1	19.6	18.3	10.4	9.5	1.5	1.6
Peer group average		18.8	16.6	9.4	8.4	2.0	2.2
La Doria	€ 228.5	7.6	9.3	6.3	7.2	2.8%	2.3%
Premium/(discount) to peer group		(59.8%)	(44.3%)	(32.8%)	(14.2%)	42.2%	7.2%

Source: Edison Investment Research estimates and Bloomberg consensus. Note: Prices at 16 November 2016.

Our primary valuation methodology is DCF analysis and we calculate a fair value of €10.99/share (from €10.91), or 49% upside from the current level. This is based on our assumptions of a 1.0% terminal growth rate and a 7.5% terminal EBIT margin. Our WACC of 6.3% is based on an equity risk premium of 4%, a borrowing spread of 5% and beta of 0.8.Our fair value has moved up slightly due to the reduction in share price since our last note. This has caused the debt/equity split to change, slightly reducing WACC. 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 6.5% (which compares to La Doria’s reported EBIT margin of 8.1% in 2015, and a company target of 5.6% EBIT margin at the trough in 2017e) and a terminal growth rate of c -1%.

Exhibit 2: DCF sensitivity to terminal growth rate and EBIT margin (€ per share)

Terminal growth		EBIT margin
			6.5%	7.0%	7.5%	8.0%	8.5%	9.0%
	-2.0%		6.2	6.8	7.3	7.9	8.4	9.0
	-1.0%		6.9	7.6	8.2	8.8	9.5	10.1
	0.0%		7.9	8.6	9.4	10.1	10.9	11.6
	1.0%		9.2	10.1	11.0	11.9	12.8	13.7
	2.0%		11.1	12.2	13.3	14.5	15.6	16.7
	3.0%		14.2	15.6	17.1	18.6	20.1	21.5
	4.0%		19.9	22.0	24.1	26.3	28.4	30.5

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 private label (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 3: Financial summary

	€ms	2013	2014	2015	2016e	2017e	2018e
December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		604.4	631.4	748.3	654.8	661.3	701.0
Cost of Sales		(521.2)	(527.6)	(616.9)	(550.2)	(564.3)	(591.2)
Gross Profit		83.2	103.8	131.5	104.5	97.0	109.8
EBITDA		43.4	60.0	77.6	58.1	50.7	61.5
Operating Profit (before amort. and except.)		31.3	48.1	61.0	43.1	61.0	43.1
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)		2.5	0.3	3.6	3.3	0.0	0.0
Operating Profit		33.8	48.4	64.6	46.4	38.2	49.0
Net Interest		(4.7)	(4.1)	(3.6)	(3.3)	(3.0)	(3.7)
Profit Before Tax (norm)		26.6	44.0	57.4	39.8	35.2	45.3
Profit Before Tax (FRS 3)		29.2	44.3	61.0	43.1	35.2	45.3
Tax		(7.9)	(14.3)	(16.1)	(12.9)	(10.6)	(13.6)
Profit After Tax (norm)		19.7	29.9	44.8	30.2	24.7	31.7
Profit After Tax (FRS 3)		21.2	29.9	44.8	30.2	24.7	31.7

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	144.6	97.3	79.5	102.2
EPS - (IFRS) (c)		52.5	81.5	144.6	97.3	79.5	102.2
Dividend per share (c)		12.0	22.0	28.0	21.0	17.0	24.0

Gross Margin (%)		13.8	16.4	17.6	16.0	14.7	15.7
EBITDA Margin (%)		7.2	9.5	10.4	8.9	7.7	8.8
Operating Margin (before GW and except.) (%)		5.2	7.6	8.1	8.1	6.6	5.8

BALANCE SHEET
Fixed Assets		114.8	179.6	177.6	173.6	171.6	169.6
Intangible Assets		4.0	10.6	10.6	9.9	9.2	8.5
Tangible Assets		98.9	146.6	143.3	140.0	138.7	137.4
Investments		11.9	22.3	23.7	23.7	23.7	23.7
Current Assets		336.1	374.0	398.8	413.3	441.7	477.9
Stocks		194.1	212.9	199.8	209.1	217.3	227.6
Debtors		89.0	100.3	107.7	98.2	102.5	108.7
Cash		27.9	41.1	77.9	92.7	108.6	128.3
Other		25.1	19.6	13.3	13.3	13.3	13.3
Current Liabilities		(214.8)	(229.1)	(220.7)	(208.6)	(216.5)	(226.9)
Creditors		(129.2)	(143.7)	(129.3)	(117.2)	(125.1)	(135.6)
Short term borrowings		(85.7)	(85.4)	(91.4)	(91.4)	(91.4)	(91.4)
Long Term Liabilities		(82.8)	(136.6)	(157.3)	(147.2)	(131.7)	(131.7)
Long term borrowings		(50.7)	(93.9)	(116.6)	(116.6)	(116.6)	(116.6)
Other long term liabilities		(32.1)	(42.6)	(40.7)	(30.5)	(15.1)	(15.1)
Net Assets		153.3	187.9	198.4	231.2	265.1	288.9

CASH FLOW
Operating Cash Flow		23.3	53.7	58.2	36.6	35.6	41.9
Net Interest		(4.7)	(4.1)	(3.6)	(3.3)	(3.0)	(3.7)
Tax		0.0	0.0	0.0	0.0	0.0	0.0
Capex		(9.1)	(17.2)	(8.4)	(11.0)	(10.5)	(10.5)
Acquisitions/disposals		0.0	(64.8)	(4.9)	0.0	0.0	0.0
Financing		0.0	0.0	0.0	0.0	0.0	0.0
Dividends		(4.4)	(6.3)	(9.3)	(7.5)	(6.2)	(7.9)
Other		2.8	8.6	(23.3)	0.0	0.0	0.0
Net Cash Flow		8.0	(30.2)	8.7	14.7	15.9	19.8
Opening net debt/(cash)		118.0	108.5	138.2	130.1	115.3	99.4
HP finance leases initiated		0.0	0.0	0.0	0.0	0.0	0.0
Other		1.5	0.5	(0.6)	0.0	(0.0)	0.0
Closing net debt/(cash)		108.5	138.2	130.1	115.3	99.4	79.7

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

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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