La Doria Investment Continues

The cooler weather in Italy in May delayed the start of the tomato campaign, which is currently expected to finish in the first half of October. Volumes so far are slightly lower than expected, resulting in rising prices. Importantly, deliveries of fresh tomatoes are being adversely affected by changeable weather, which is causing lines to run below full capacity. As a reminder, La Doria has ‘cost-plus’ agreements with some of its strategic customers, so will be able to pass on any increased costs. This helps mitigate the risk for margin compression.

H119 results as expected

Sales growth was particularly impressive in the Vegetable line (8.6%) with strong growth in international markets, and the Sauces division (4.8%). The Red line was stable (+0.8%), while the Fruit line continued to decline (-1.7%) due to a fall in domestic consumption. EBITDA margin was down 50bp during the period due to higher costs, while the EBIT margin was down 100bp due to higher depreciation as the investment plan is underway. With customer negotiations still ongoing across the Red line, Pulses, pasta Sauces and Fruit lines, we leave our estimates unchanged at this stage.

Valuation: Fair value of €14.00/share

Our DCF model indicates a fair value of €14.00 per share (from €13.60 previously as we roll forward our DCF), or c 60% upside from the current share price. La Doria trades on 9.5x FY20e P/E, a c 25% discount to its private-label peer group. On EV/EBITDA it trades at 7.0x FY20e, a c 20% discount. We believe La Doria remains an attractive proposition, given the strength of its market position in the private-label segment. Management remains committed to improving the stability of the business, while continuing to invest to maintain its competitive edge.

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Business description

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

H119 results review

Consolidated revenues were up 2.7% y-o-y to €358.7m in H119, or +2.3% at constant currency. EBITDA was down 5% to €23.3m, with the EBITDA margin down 50bp to 6.5%. EBIT was down 17% to €15.0m, with the margin down 100bp to 4.2%. Net debt was €107.2m vs €112.3m at the end of FY18 and €64.4m at the end of H118, following a major investment of €32.5m during H119, as part of management’s investment plan.

The Pulses and Vegetables line performed strongly, with sales up 8.6%. The Sauces line also showed good growth (+4.8%), while the tomato-based business was broadly flat (+0.8%). The Fruit line continued to suffer, with revenues down 1.7% due to continued weak consumption in the domestic market, and the ‘other lines’ (ie the trading business that goes through UK subsidiary LDH) was down marginally in sales terms (-0.9%). Overall, sales in the domestic market were down (-4.4%), while international sales were up (+4.4%).

Valuation

We illustrate La Doria’s valuation versus its peers in Exhibit 1 below. On our 2020 estimates, La Doria currently trades at a c 25% discount on a P/E basis, which we believe is unwarranted given the company’s balance sheet is conservatively managed. On EV/EBITDA, La Doria trades at a c 20% discount to the peer group

We have rolled forward our DCF to commence in 2020, so our fair value rises to €14.00 per share (from €13.60 previously). This is based on our assumptions of a 1.5% terminal growth rate and a 7.0% terminal EBIT margin. Our WACC of 6.4% is predicated on an equity risk premium of 4%, borrowing spread of 5% and beta of 0.8. Below, we show a sensitivity analysis to our assumptions and note that the current share price is discounting a terminal EBIT margin of 5.5% (which compares with La Doria’s FY18 EBITDA margin of 7.7% and EBIT margin of 5.1%) and a terminal growth rate of 0.1%.