Total Produce (TOT.I) – Growing Profits

(This is the seventh installment in my series of case studies on the shares that make up my portfolio. To see the other six articles, on Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names. To download a summary of how my valuations stack up against tonight’s closing prices, click here)

 

Headquartered in Ireland, Total Produce is the largest fruit and vegetable distributor in Europe, transporting 250 million cartons of fresh produce annually. It has 88 distribution facilities across 19 countries, which makes the firm an important partner for both local and transnational retailers. The group’s goal is to deliver enhanced shareholder value through a combination of organic growth and by leading the consolidation of Europe’s fragmented produce distribution sector (despite being the largest player in the industry, Total Produce’s market share is estimated at only 5%).

 

While this is clearly a small company, with a market capitalisation of only €127m, there are a number of attractions to it, specifically: a very stable business model; a very inexpensive rating; a strong balance sheet and a high and well-covered dividend.

 

On the first point, despite the headwinds of challenging economic conditions and volatile exchange rates and commodity prices, management has done a great job of steering the group through these pressures, with adjusted group EBITA remaining in a very tight range (1.80-1.85%) between 2008 and 2010 (the firm’s 2011 results are expected in March). The group has long-established relationships with many of the world’s largest growers, while in terms of its customer base this is split as follows – Eurozone 49% of third party revenues, Scandinavia 23%, UK 19%, Other (mainly India, South Africa and Eastern Europe) 6% and Consumer Goods & Healthfood 3%. The group has also been quietly delivering on its strategy, spending €137m between 2005 and 2010 on acquisitions and joint ventures, while also buying back €8.7m worth of its own shares over the same period. It has also been investing heavily in its infrastructure, spending over €100m on PPE in the past 6 years. This investment saw ROCE slip to just 7.9% in 2009, but it has been recovering of late (I estimate that ROCE was 8.8% last year).

 

On the valuation, no matter how you look at it, the stock looks cheap. The stock trades on a 2012 PE multiple (based off consensus EPS) of 5.2x. I estimate that it exited 2011 with a NAV of 51.5c, which puts it on a P/B multiple of 0.7x. On my adjusted (which incorporates the pension deficit) 2012 EV/EBITDA multiple, Total Produce is valued at only 3.1x.

 

The company has a strong balance sheet, with net debt of circa 1.1x EBITDA. At the end of June the group was sitting on gross cash of €90m. Cash generation at the firm is impressive, with the firm having generated total operating cashflows of €137m – nearly 10% more than its current market cap – between 2008 and 2010 alone.

 

In terms of distributions to shareholders, Total Produce yields 5.1%, with the dividend covered 3.8x. As noted above, the group also has form for buying back its own shares, and I wouldn’t be surprised to see more buybacks given its low rating.

 

So, with a strong balance sheet, a solid track record, a high and well-covered dividend and a cheap valuation, this is a stock I like. In my model I adopt a conservative approach, using a blend of my estimated 2012 NAV (53c), a sum-of-the-parts valuation (59c) incorporating the implied EV/Sales multiples it has paid for its largest acquisitions to date and a discounted cash flow model (64c). Taking the average of all three produces a valuation of 59c, which offers 53% upside from current levels. Is this too aggressive? Well, the implied 2012 multiples at a price of 59c are as follows – 8.0x PE, 1.1x P/B and 4.3x EV/EBITDA, while the dividend yield would be 3.3% at that price. Rather than being aggressive, this makes me wonder if I’m being too timid for coming up with such a valuation! Perhaps I am erring too much on the side of caution, but instinctively I would be reluctant to pay much more than a high single digit PE for a business, even one with such a stable business model, with limited organic growth potential. In any event, the stock looks anomalously cheap here.

 

Note: This is an edited version of an article that I wrote for Marketwatch earlier this week