Aryzta Could be Interesting Bargain

Aryzta AG is an international specialist food company, originally from Ireland, but nowadays headquartered in Switzerland. It is primarily focused on specialty baking. The Company’s products include Artisan Breads, Sweet Baked Goods and Morning Goods, as well as an array of other Savoury Items, Such As Pizza, Tarts and Pies. It operates through four segments, including Food Europe, Food North America, Food Rest of World and Origin. The company operates bakeries across South America, Asia, Europe, North America, Australia, and New Zealand, and serves retailers, food service operators, and wholesalers worldwide.

Aryzta is a company with an elevated debt level and an EBITDA that has shrunk from 600 million euros to 300 million euros expected, with the share price falling about 90% from the maximum levels hit midway through 2014, nearly 90 Swiss francs per share, to bottom out this year under 10 Swiss francs per share.

The Swiss-Irish company has warned on its at least three times since 2017 due to rising distribution and labor costs in North America, problems with undocumented workers at a U.S. bakery, high butter prices and weak consumer spending in some European markets, particularly Britain following its vote to leave the European Union.

Also, chief executive Kevin Toland, who started last September, admits the challenges: “While we have made a solid progress in what is a multi-year turnaround programme, we have clearly underestimated the extent of the challenges and the time required to address those challenges.”

Aryzta also announced a three-year restructuring plan, to be implemented immediately, which it expects to deliver a cumulative 200 million euros in cost savings over three years. The company said the plan is aimed at restoring the company’s “financial flexibility”. Aryzta has identified and is addressing the challenges facing the historical business model and the industry generally and will stay focused on its core, the frozen B2B bakery market.

in recent years, the Group had become too complex and expanded beyond its core strengths. As part of the ongoing process, the group has sold selected loss-making assets, rationalised headcount, and under the new management put in place a series of efficiency and cost reduction activities to accelerate performance improvement. In January 2018, Aryzta sold La Rousse Foods and in February they disposed of both the Cloverhill Chicago and Cicero facilities. The proceeds from these disposals were used to reduce debt and improve company’s balance sheet.

The company also tells positive news. Aryzta announced in September 2018, that it has agreed an underwriting deal with five banks, setting the stage for raising 800 million euros ($928.48 million) in new capital to strengthen its balance sheet. The deal with banks and lenders shows that Aryzta is making progress toward the capital increase and helped to reduce uncertainty. The amended credit conditions should provide the flexibility to execute on the turnaround measures. Aryzta needs this of equity capital to create the necessary strategic and financial flexibility to implement its business plan. Aryzta CEO, Kevin Toland, commented: “A significantly improved capital structure will provide Aryzta with the means to continue to take the necessary steps to re-position the business and deliver on our strategy. Over the medium-term, we expect to generate significant cash flow which will be applied towards continued net debt reduction and to resource selective growth opportunities.”

In addition to the announced capital increase and the successful disposals already completed, the Board of Aryzta remains committed to its previously announced 1.0 billion euros deleveraging plan, comprising at least 450 million euros of asset disposals and driving the remainder from cash flow generation. Such disposals will be pursued under normal business conditions, rather than being perceived as distressed sales.

 

Valuation

Aryzta’s revenue has not barely declined. The problem has been increased costs. Cost of goods and S,G&A costs have grown inattentively and turned the operational result into negative. Even though earnings have been negative, the company has been able to generate positive operating and free cash flow.

Aryzta is on a balance sheet basis bargain. The company’s P/B is 0.4 (even though a substantial part of the balance sheet value is in intangible assets), P/S is 0.24 and price to FCF is 3.5. In fact, following just published annual report 2018, IFRS diluted net loss per share of the company is clearly decreased compared to the previous year.

A lot of expectation for turning the company has been given to the new board and management. Aryzta’s current chairman is Gary McGann who has a good reputation from Smurfit Kappa guiding the company on the right path. New operational directors Kevin Toland joined ARYZTA as CEO in September 2017 and Frederic Pflanz joined ARYZTA as CFO in January 2018 have taken strong action right away.

Aryzta is still the world’s leading frozen bakery company, operating in a growing market. The global frozen bakery market is expected to grow about 5% per year until 2023. It is not believable for the sector’s leader to have much lower EBITDA margins than its competitors posting margins between 10% and 15%. I don’t believe there are no sufficient reasons for this. European and American leader Aryzta shouldt improve on its present margins and achieve figures more in line with its competitors.

Significant owners of the company are two famous value investing household names Cobas Asset Management (Francisco Garcia Parames) 10% ownership and Causeway Capital Management 7.5% ownership.

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