Sector financial performance:

This company, who primarily provides bottle water and refill of bottle water based on self-service machines, has been grouped in Bottled water /ice sector of food industry.

It seems demand for bottle water has been strong as indicated by continuingly increasing sales volume with relatively stable price. However, demand for machine-based refill of water seems to be decreasing as indicated by decrease in sales volume.

As a result of upward trend in price and favourable product/mix, we have been seeing improved margin among companies in this sector in 2015/16. However, pressure on price increased since then and has been the major factor causing margins of companies to go down. The typical gross margin is about 20% in 2018. With about 11.5% SG&A, the operating is about 9%.

The typical enterprise price/EBI ratio is about 42 in 2018 with an interest/EBITDA ratio of 46%.

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Company performance:

It seems that the sales from its newly acquired business decreased as indicated by decrease in sales units. The general trend in demand for its bottle water and dispensers has been going up since 2015 as indicated by its sales units.

For third quarter of Fiscal 2018 compared with same period of 2017 (ended 20170930)

Refill sales decreased about 6% due to decrease of 14.5% in some certain products units offset by increased price.

Bottle water segment sales increased about 5% due to increase of 10% in sales-store units sales.

Dispenser sales increased about 14% due to increase of about 11% in units.

For first nine months of Fiscal 2018 compared with same period of 2017 (ended 20170930)

Refill sales units decreased about 11% in some certain products offset by increased price.

Bottle water segment sales increased about 8% due to increase of 10% in sales-store units sales.

Dispenser sales increased about 20% due to increase of about 18% in units.

Fiscal 2017 compared with 2016 (ended 20171231)

Bottle water segment sales increased about 4.7% due to increase of 6.2% in sales-store units sales.

Dispenser sales increased about 2% due to increase of about 8% in units.

Sales increase 12% and 20% in 2016 and 2015 respectively mainly attributable to same store sales increase.

Because increase in sales came more from increase in higher margin segment (the water segment), the gross margin (adjusted by unrepeated items) of company increased to 22% and 18% in 2016 and 2015 respectively. Impact from acquisition of Glacier on its financial performance is apparent but probably not what company expected. For example, as the same time it boost up its sales number it also dragged down gross margin to about 20% in 2018 with about 11% SG%A% and generated a about 9% operating margin. In addition, due to more borrowing related to Glacier acquisition it is paying more interest, which largely offset the increased cash inflow from glacier acquisition. Due to uncertainties of sales growth, it may be the key for this company to improve its gross margin. In fact, this company may want to be more efficient on its capital expenditure.

Stock price

Our valuation methods and analysis indicate that this stock is currently relatively overvalued by the market with an enterprise price/EBI of about 42 considering increasingly intensive competition and pressure on margin.