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Erste Group Research – Company Report
Otmuchow | Confectionary | Poland
4 April 2013
Otmuchow
from Buy to Accumulate
PLN mn
2011
2012
Net sales
228.8
315.4
EBITDA
21.4
25.4
EBIT
14.3
13.6
Net result after min.
8.7
6.5
EPS (PLN)
0.68
0.51
CEPS (PLN)
1.86
1.34
BVPS (PLN)
9.36
9.86
Div./share (PLN)
0.00
0.00
EV/EBITDA (x)
7.0
8.4
P/E (x)
8.4
20.9
P/CE (x)
3.1
8.0
Dividend Yield
0.0%
0.0%
Share price (PLN) close as of 02/04/2013
Number of shares (mn)
Market capitalization (PLN mn / EUR mn)
Enterprise value (PLN mn / EUR mn)
2013e
335.5
30.2
17.8
10.6
0.83
1.86
10.69
0.00
7.0
13.7
6.1
0.0%
2014e
356.9
31.2
19.4
12.2
0.96
1.94
11.65
0.00
6.2
11.9
5.8
0.0%
11.4
12.7
145 / 35
211 / 50
52 weeks
15
14
13
12
11
10
9
8
Performance
in PLN
Otmuchow SA
WIG (Rebased)
12M
6M
3M
1M
15.9%
13.7%
4.0%
-14.5%
Reuters
OTMP.WA Free float
Bloomberg
OTM PW Shareholders
Div. Ex-date
Target price
13.0 Homepage:
49.1%
Zarus HL (50.9%)
PZU PF (14.2%)
www.zpcotmuchow.pl
Anticipating benefits from higher margins
Analyst:
Marek Czachor
+48 22 330 62 54
[email protected]
After a period that saw heavy CAPEX (new product lines and the
acquisition of Odra), the company is set to concentrate on the improvement
of its margins.
The acquisition of Odra, which burdened the results in 2012, should
translate into growth of the group’s margins and make the company less
dependent on its main client.
Due to its exposure to the quickly growing discount segment in Poland and
the recently installed modern product lines, we see Otmuchow as an
attractive acquisition target.
Alongside the cut in profit forecasts for the coming fiscal years, we slash
our 12M target price to PLN 13. However, we issue an Accumulate
recommendation on the stock, as we believe in the longer-term growth of
Otmuchow profits.
Erste Group Research – Company Report 04 April 2013
All prices are those current at the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors.
Page 1
04 April 2013
Investment story
The weaker than anticipated 4Q12 results (especially on the top line)
prompted us to revise down our forecasts for the coming years. After three
years of heavy CAPEX on new production lines and the acquisition of Odra
(financed by debt and a new share issue), the company plans to
concentrate on the improvement of its margins, which should lead to a
better return on invested capital.
Our assumption includes only slight growth of profitability - not to the levels
reported in 2008-09. We anticipate that the operating improvement in 2013
will come mainly from subsidiary Odra, the restructuring of which burdened
the 2011-12 results.
Otmuchow has exposure to the quickly growing market of private labeled
brands in discount chains and needs to strengthen its second leg of
branded products business. Additionally, it has recently installed modern
production lines. Thus, despite the current slowdown of top line growth, we
see its fundamental valuation as cheap and thus issue an Accumulate
recommendation, with a 12M target price of PLN 13.
Financials
Change in estimates
Consolidated, IFRS
(PLN, mn)
2012
2013e
2014e
Reported
Before
Change
Now
Before
Change
Now
Before
Change
Sales
315.4
340.5
-7%
335.5
408.6
-18%
356.9
441.2
-19%
Gross profit
73.6
79.8
-8%
79.5
95.1
-16%
84.4
102.7
-18%
23.3%
23.4%
-0.1%
23.7%
23.3%
0.4%
23.7%
23.3%
0.4%
EBITDA
25.4
29.3
-14%
30.2
35.3
-14%
31.2
37.2
-16%
margin
margin
8.0%
8.6%
-0.6%
9.0%
8.6%
0.4%
8.8%
8.4%
0.3%
EBIT
13.6
17.9
-24%
17.8
24.2
-27%
19.4
26.1
-26%
Interest paid
4.7
4.5
3%
4.4
4.1
8%
3.4
3.0
14%
Net profit
6.5
10.8
-40%
10.6
16.3
-35%
12.2
18.8
-35%
Operating CF
11.6
11.9
-2%
18.3
25.1
-27%
25.3
29.0
-13%
Net investments
-4.6
-5.7
-19%
-4.3
-5.4
-22%
-4.3
-10.4
-59%
DPS
0.0
0.0
0%
0.0
0.0
0%
0.0
0.7
Net debt
63.5
64.5
-2%
53.8
48.9
10%
36.2
33.4
8%
Source: Otmuchow, Erste Group Research
The lower level of sales, which we feel will not be balanced by an
improvement of margins in the short term, prompted us to cut EBITDA and
net profit forecasts for the coming fiscal years, as well as CAPEX
assumptions, as we expect Otmuchow to increase the utilization of its
product lines.
Page 2
04 April 2013
Margins
35%
30%
25%
20%
15%
10%
5%
0%
ROIC
ROE
EBITDA margin
net margin
2008
13%
22%
8%
4%
2009
18%
30%
12%
8%
2010
10%
13%
11%
7%
2011
5%
7%
9%
4%
2012
3%
5%
9%
3%
2013e
5%
7%
9%
4%
2014e
6%
8%
8%
4%
2015e
7%
9%
8%
4%
2016e
9%
9%
8%
4%
Source: Company data, Erste Group estimates
Cash flow
40
PLN mn
20
0
-20
-40
-60
-80
-100
dividend
Net Investments
Operating
net cash
2007
0
-1
4
-10
2008
0
-24
1
-23
2009
0
-22
19
-27
2010
0
-35
7
-11
2011
0
-89
26
-66
2012
0
-6
12
-65
2013e
0
-4
18
-54
2014e
0
-4
25
-36
2015e
0
-4
25
-17
2016e
-4
-4
25
-2
Valuation
We employed a DCF model as our valuation tool, based on our forecasts
for 2014-17. We used a discount rate based on WACC and a terminal
value based on perpetuity and the diluted number of shares. The DCF
model led us to a 12-month target price of PLN 13 per share, which, in our
opinion, reflects the value of the company in a more proper way than a
peer comparison, as it includes future prospects.
Page 3
04 April 2013
WACC calculation
2013e
2014e
2015e
2016e
2017e
NY/TV
Risk free rate
Equity risk premium
Beta
Cost of equity
4.0%
6.0%
1.0
10.0%
4.0%
6.0%
1.0
10.0%
4.0%
6.0%
1.0
10.0%
4.0%
6.0%
1.0
10.0%
4.0%
6.0%
1.0
10.0%
5.0%
5.7%
1.0
10.7%
Cost of debt
Effective tax rate
After-tax cost of debt
6.5%
19.0%
5.3%
6.5%
19.0%
5.3%
6.5%
19.0%
5.3%
6.5%
19.0%
5.3%
6.5%
19.0%
5.3%
7.5%
19.0%
6.1%
80%
9.1%
89%
9.5%
97%
9.9%
98%
9.9%
85%
9.3%
85%
10.0%
(PLN mn)
2013e
2014e
2015e
2016e
2017e
NY/TV
Sales growth
EBIT
EBIT margin
Tax rate
Taxes on EBIT
NOPLAT
6.4%
17.8
5.3%
19.0%
-3.4
14.4
6.4%
19.4
5.4%
19.0%
-3.7
15.7
6.4%
21.2
5.6%
19.0%
-4.0
17.2
6.4%
22.5
5.6%
19.0%
-4.3
18.2
6.4%
23.9
5.6%
19.0%
-4.5
19.4
1.5%
25.1
5.8%
19.0%
-4.8
20.3
12.5
34.5%
-9.7
-48.2%
-4.3
11.8
36.3%
-2.7
n/a
-4.3
10.5
40.8%
-2.9
0.0%
-4.3
10.1
42.5%
-3.0
-12.5%
-4.3
9.7
44.3%
-3.2
-12.5%
-4.3
12.0
100.0%
-0.8
-12.6%
-12.0
12.9
20.6
20.6
21.0
21.5
19.5
13.7
1.5%
233.2
148.8
Equity weight
WACC
DCF valuation
+ Depreciation
Capital expenditures / Depreciation
+/- Change in working capital
Chg. working capital / chg. Sales
- Capital expenditures
Free cash flow to the firm
Terminal value growth
Terminal value
Discounted free cash flow - Dec 31 2012
Enterprise value - Dec 31 2012
11.8
222.4
Minorities
Non-operating assets
Net debt
Other adjustments
Equity value - Dec 31 2012
12.1
0.0
63.5
0.0
146.8
Number of shares outstanding (mn)
Cost of equity
12M target price per share (PLN)
12.7
10.0%
13.0
Current share price (PLN)
Up/Downside
11.4
13.8%
Enterprise value breakdown
17.4
15.9
14.7
Sensitivity (per share)
13
4.8%
5.3%
5.8%
6.3%
6.8%
WACC
PV of
terminal
value
67%
PV of
detailed
period
33%
9.0%
9.5%
10.0%
10.5%
11.0%
12.0
11.3
10.6
10.0
9.5
13.4
12.5
11.8
11.1
10.5
14.7
13.8
13.0
12.2
11.6
16.1
15.1
14.2
13.4
12.7
17.4
16.3
15.4
14.5
13.7
WACC
Terminal value EBIT margin
13
9.0%
9.5%
10.0%
10.5%
11.0%
0.5%
12.8
12.1
11.5
10.9
10.4
2.0%
15.9
14.8
13.9
13.0
12.3
2.5%
17.2
16.0
14.9
13.9
13.1
Source: Erste Group Research
Page 4
Terminal value growth
1.0%
1.5%
13.7
14.7
12.9
13.8
12.2
13.0
11.5
12.2
10.9
11.6
04 April 2013
In comparison with international companies from the confectionary
segment, Otmuchow is traded at a 40% discount for the 2013 fiscal year,
based on P/E, EV/EBIT and EV/EBITDA multiples, and at a 50% discount
for 2014. Such a discount comes from the weaker balance sheet in
comparison to its peers’ and a strong dependence on sales of private
labeled brands to discount chains.
Peer group comparison
P/E
EV/EBIT
EV/EBITDA
2012
2013e
2014e
2012
2013e
2014e
2012
2013e
2014e
Wawel
17.9
16.5
14.3
14.6
12.6
11.1
12.6
11.1
9.6
Mieszko
15.5
12.5
10.9
14.0
12.9
11.8
9.5
8.8
8.1
Colian
7.3
10.8
8.1
8.2
9.0
9.4
5.6
5.5
6.1
Ulker Biskuvi Sanayi
29.0
29.6
26.8
22.0
20.2
18.4
17.3
16.0
14.8
Want Want China
32.9
29.3
25.0
24.6
22.1
18.5
23.9
19.7
16.6
Lindt & Spruengli
Kraft
20.5
22.8
20.3
22.0
20.2
18.4
17.3
16.0
14.8
22.1
19.6
17.4
14.3
14.7
13.2
11.1
11.7
10.8
Nestle
20.4
19.0
17.5
15.0
15.6
14.3
12.2
12.6
11.6
Hershey
26.9
23.8
21.8
13.9
11.2
10.1
11.8
9.7
8.8
Median total
12.7
11.7
14.6
10.2
12.9
11.9
10.7
10.1
9.5
Otmuchów
20.9
13.7
11.9
15.6
11.9
10.0
8.4
7.0
6.2
Premium/discount
64%
17%
-19%
54%
-8%
-17%
-22%
-31%
-35%
Implied value
10.3
14.1
20.2
8.3
18.5
18.5
18.6
22.0
21.7
Polish peers
Emerging markets peers
Developed markets peers
Source: Factset, Erste Group Research
Assumptions
Our estimates are based on the following assumptions:
Risk-free rate at 4.0%, equity premium at 6.0%, debt premium
2.5% and beta 1.0.
CAPEX below depreciation in 2013-17.
Effective tax rate at 19% in 2013-17.
Terminal value growth rate at 1.5%.
We do not include any acquisitions in our forecasts
Page 5
04 April 2013
Income Statement
(IFRS, PLN mn, 31/12)
Net sales
Cost of goods sold
Gross profit
SG&A
Other operating revenues
Other operating expenses
EBITDA
Depreciation/amortization
EBIT
Financial result
Extraordinary result
EBT
Income taxes
Result from discontinued operations
Minorities and cost of hybrid capital
Net result after minorities
Balance Sheet
2009
2010
2011
2012
2013e
2014e
31/12/2009
31/12/2010
31/12/2011
31/12/2012
31/12/2013
31/12/2014
142.81
-105.34
37.48
-22.52
0.40
-0.75
17.77
-3.16
14.61
-0.87
0.00
13.74
-2.63
0.00
0.00
11.12
156.67
-120.02
36.65
-23.44
1.08
-0.59
17.86
-4.17
13.69
-0.89
0.00
12.80
-2.32
0.00
0.00
10.48
228.76
-172.42
56.34
-39.49
2.32
-4.92
21.36
-7.11
14.25
-2.07
0.00
12.18
-2.48
0.00
-1.04
8.66
315.38
-241.75
73.62
-59.73
2.76
-3.07
25.37
-11.78
13.58
-4.88
0.00
8.70
-2.04
0.00
-0.14
6.52
335.46
-255.94
79.52
-61.75
0.00
0.00
30.22
-12.45
17.77
-4.34
0.00
13.43
-2.55
0.00
-0.30
10.58
356.86
-272.46
84.40
-65.00
0.00
0.00
31.23
-11.84
19.39
-3.36
0.00
16.04
-3.05
0.00
-0.80
12.19
2009
2010
2011
2012
2013e
2014e
0.62
60.38
0.68
61.68
5.72
37.07
1.42
0.58
44.79
106.47
44.49
0.00
0.00
0.00
4.64
19.81
0.00
19.81
8.19
29.35
37.53
106.47
4.91
87.92
11.03
103.85
9.70
48.65
0.38
21.26
80.00
183.85
110.90
0.55
0.00
0.00
4.56
22.89
0.00
22.89
9.09
35.87
44.96
183.85
22.96
162.90
2.94
188.80
18.20
69.28
0.78
1.51
89.76
278.56
119.26
12.07
0.00
0.00
12.88
38.43
1.50
39.93
28.75
65.68
94.43
278.56
22.24
158.09
2.37
182.70
19.07
80.51
0.52
4.52
104.61
287.31
125.70
12.12
0.00
0.00
11.34
29.94
2.76
32.69
38.04
67.41
104.78
287.31
22.24
149.94
2.52
174.70
19.96
93.27
0.55
3.36
117.14
291.84
136.28
12.12
0.00
0.00
12.06
25.19
2.76
27.94
32.01
71.43
102.72
291.84
22.25
142.39
2.69
167.32
21.25
99.22
0.58
3.57
124.63
291.95
148.47
12.12
0.00
0.00
12.83
17.50
2.76
20.26
22.24
76.03
97.51
291.95
2009
2010
2011
2012
2013e
2014e
18.60
-22.27
3.71
0.15
6.67
-34.50
48.76
20.68
25.75
-88.59
43.07
-19.76
11.57
-4.61
-3.96
3.01
18.27
-4.26
-15.17
-1.16
25.32
-4.27
-20.85
0.21
2009
2010
2011
2012
2013e
2014e
22.3%
12.4%
10.2%
7.8%
30.0%
17.9%
41.8%
27.4
5.8
76.5
19.1
9.7%
11.4%
8.7%
6.7%
13.5%
11.0%
60.6%
10.7
34.7
126.7
15.6
46.0%
9.3%
6.2%
4.2%
7.5%
6.7%
47.1%
65.7
-5.4
211.4
12.4
37.9%
8.0%
4.3%
2.1%
5.3%
4.9%
48.0%
63.5
-0.7
215.4
13.0
6.4%
9.0%
5.3%
3.2%
8.1%
6.7%
50.8%
53.8
13.9
217.1
13.1
6.4%
8.8%
5.4%
3.6%
8.6%
7.3%
55.0%
36.2
26.5
212.3
13.2
(IFRS, PLN mn, 31/12)
Intangible assets
Tangible assets
Financial assets
Total fixed assets
Inventories
Receivables and other current assets
Other assets
Cash and cash equivalents
Total current assets
TOTAL ASSETS
Shareholders'equity
Minorities
Hybrid capital and other reserves
Pension and other LT personnel accruals
LT provisions
Interest-bearing LT debts
Other LT liabilities
Total long-term liabilities
Interest-bearing ST debts
Other ST liabilities
Total short-term liabilities
TOTAL LIAB. , EQUITY
Cash Flow Statement
(IFRS,PLN mn, 31/12)
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
CHANGE IN CASH , CASH EQU.
Margins & Ratios
Sales growth
EBITDA margin
EBIT margin
Net profit margin
ROE
ROCE
Equity ratio
Net debt
Working capital
Capital employed
Inventory turnover
Page 6
04 April 2013
Contacts
Group Research
Head of Group Research
Friedrich Mostböck, CEFA
Major Markets & Credit Research
Head: Gudrun Egger, CEFA
Adrian Beck (Fixed income AT, CH)
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Mildred Hager-Germain (Fixed income Euro, US)
Alihan Karadagoglu (Corporates)
Peter Kaufmann (Corporates)
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Macro/Fixed Income Research CEE
Head CEE: Juraj Kotian (Macro/FI)
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Günter Hohberger (Banks)
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Daniel Lion, CIIA (IT)
Christoph Schultes, CIIA (Insurance, Utility)
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Marek Czachor (Equity)
Adam Rzepecki (Equity)
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Head: Mihai Caruntu (Equity)
Head: Dumitru Dulgheru (Fixed income)
Chief Analyst: Eugen Sinca (Fixed income)
Dorina Cobiscan (Fixed Income)
Raluca Ungureanu (Equity)
Marina Alexandra Spataru (Equity)
Research Slovakia
Head: Maria Valachyova (Fixed income)
Martin Balaz (Fixed income)
Research Turkey
Head: Can Yurtcan
Evrim Dairecioglu (Equity)
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+43 (0)5 0100 16574
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+43 (0)5 0100 16314
+43 (0)5 0100 11905
+43 (0)5 0100 17343
+43 (0)5 0100 11913
+43 (0)5 0100 16360
+420 956 711 014
+381 11 22 09 178
+385 62 37 1383
+385 62 37 2833
+385 62 37 2419
+385 62 37 2825
+420 224 995 439
+420 224 995 172
+420 224 995 227
+420 224 995 289
+420 224 995 232
+420 224 995 434
+420 224 995 192
+420 224 995 456
+420 224 995 213
+361 235-5131
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+40 21 311 2754
+40 37226 1029
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+40 21 311 2754
+421 2 4862 4185
+421 2 4862 4762
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Page 7
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04 April 2013
Otmuchow SA
Rating history
Date
09. Oct 12
15.0
Rating
Buy
Price
9.65
Target Price
14.00
14.0
13.0
12.0
11.0
10.0
Company description
9.0
The confectionary producers specializing in delivering goods
under private labelled brands to discount chains. Currently
Otmuchow plans to strenghten its brands portfolio and enter fast
growing market of products connected with 'healthy life style'.
8.0
7.0
6.0
5.0
4.0
Sep 11
Dec 11
Mar 12
Jun 12
Sep 12
Dec 12
Mar 13
Target price 12 m fwd
Page 8
Jun 13
04 April 2013
Important Disclosures
THIS DOCUMENT MAY NOT BE TAKEN, TRANSMITTED OR DISTRIBUTED INTO THE UNITED STATES, CANADA,
AUSTRALIA OR JAPAN OR TO ANY U.S. PERSON OR TO ANY INDIVIDUAL OUTSIDE CANADA, AUSTRALIA OR JAPAN
WHO IS A RESIDENT OF THE UNITED STATES, CANADA, AUSTRALIA OR JAPAN OR TO THE PRESS IN THESE
COUNTRIES
General disclosures
All recommendations given by Erste Group Research are independent and based on the latest company, industry and general information
publicly available. The best possible care and integrity is used to avoid errors and/or misstatements. No influence on the rating and/or target
price is being exerted by either the covered company or other internal Erste Group departments. Each research piece is reviewed by a senior
research executive or agreed with a senior analyst/deputy (4-eyed principle). Erste Group Compliance Rules state that no analyst is allowed to
hold a direct ownership position in securities issued by the covered company or derivatives thereof. Analysts are not allowed to involve
themselves in any paid activities with the covered companies except as disclosed otherwise. No part of their compensation was, is, or will be
directly or indirectly related to the specific recommendation(s) or views expressed by them contained in this document. Erste Group may engage
in transactions with financial instruments, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research
report. In addition, others within Erste Group, including strategists and sales staff, may take a view that is inconsistent with that taken in this
research report.
Disclosure Checklist
Company
ISIN
Otmuchow SA
PLZPCOT00018
Disclosure
Disclosures of potential conflicts of interest relating to Erste Group AG, its affiliates, subsidiaries (together “Erste Group AG”) and its relevant employees
with respect to the issuers, financial instruments and/or securities forming the subject of this document are valid as of the end of the month prior to
publication of this document. Updating this information may take up to ten days after month end.
Page 9
04 April 2013
Description of specific disclosures
Erste Group rating definitions
Buy
> +20% to target price
Accumulate
+10% < target price < +20%
Hold
0% < target price < +10%
Reduce
-10% < target price < 0%
Sell
< -10% to target price
Our target prices are established by determining the fair value of stocks, taking into account additional fundamental factors and news of relevance for the
stock price (such as M&A activities, major forthcoming share deals, positive/negative share/sector sentiment, news) and refer to 12 months from now. All
recommendations are to be understood relative to our current fundamental valuation of the stock. The recommendation does not indicate any relative
performance of the stock vs. a regional or sector benchmark.
Distribution of ratings
Coverage universe
Recommendation
Buy
Accumulate
Hold
Reduce
Sell
N.R./UND.REV./RESTR.
Total
No.
45
48
50
12
9
24
188
in %
23.9
25.5
26.6
6.4
4.8
12.8
100.0
Inv. banking-relationship
No.
in %
4
19.0
6
28.6
6
28.6
3
14.3
1
4.8
1
4.8
21
100.0
Explanation of valuation parameters and risk assessment
Unless otherwise stated in the text of the financial analysis/investment research, target prices in the publication are based on either a discounted cash flow
valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this
fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant
risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of
demand for the company’s products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases,
from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in
overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, political and social
conditions.
Page 10
04 April 2013
Disclaimer
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04 April 2013
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