Sector financial performance:

This company, which primarily manufactures and distributes shelf-stable grocery and frozen food, has been grouped into frozen& shelf-stable food sector in food industry.

Our company data indicate that this is a sector with a few of years’ declining growth in demand for its frozen and shelf-stable grocery products, which, excluding economy elastic impacts of price, were presented in declining trend of the sales volume numbers. The trend seems to have been quite consistent in both categories of products while demand for frozen food presented an earlier and larger rebounding as indicated by positive growth in volume in 2018.

As it always happens in other sector of food industry, when the demand slows down it is always more difficult for companies to pass on increased costs to the retail price since consumers may be very sensitive to raising price. It is what has been happening for traditional shelf-stable grocery. Sales volume significantly fell down when companies managed to raise price to keep their margin.  Demand for frozen food seems to have stronger resistance to raising price. However, the volatile price of commodity in the past several actually has made more difficulties to maintain stability of their profitability.

Companies’ gross margins (sector average from 27% of 2014 up to 31% of 2016 and down back to 27% of 2018) seem to be quite volatile under impact of changes in selling price, commodity costs, and warehouse and distribution costs.  At the same time, because, at the current margin level, the added profits resulted from improved margin are still able to offset the loss due to the resulted decrease in sales, we can see the increase in profits when the selling price goes up in 2015 and 2016 and decrease in profits when the average selling price deceased after entering fiscal 2017.

According our analysis, a typical ratio of enterprise price/adjusted EBI is 31with interest/EBI ratio of 40%. 

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Company performance:

It seems the demand for this company’s products had been decreasing at a rate 1.5-3% as indicated by its sale volume data between 2014 and first half of 2017, primarily attributable to decreasing demands for its shelf-stable grocery products. However, it seems that, since entering 2017, demand hit the bottom and started to rebound, as indicated by the increase in sales volume in 2018 and increased price.

For the first three quarters of fiscal 2018 compared with the same period of 2017

Organic net sales increased more than 0.9% attributable to increase of 0.9% in price and increase in volume. 

For fiscal 2017 compared with 2016

Organic net sales decreased less than 1% attributable to decrease of 0.7% in price.

Organic net sales decreased 3.6% in the first half of 2017 attributable to 3.3% decrease in sale volume and o.3% in price.

Organic net sales decreased 2.1% in 2016 compared with 2015 including a 1.4% decrease in volume/mix and 0.6% decrease due to reduced selling price.

Organic net sales have no changes in 2015 compared with 2014, reflecting a 1.5% decrease in volume/mix and 1.5% increase in price.

The gross margins as percentage of sales increased from 28% of 2014 to 31% of 2016 as a result mainly of acquisition and increased selling price. And it then went down to 23% in 2017/18 as a result of the increased warehousing and distribution costs and product/mix’s shifting.  

Correspondingly, its operating margin decreased from 17% to 12% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 30($30/share), which we think, is relatively overvalued compared with its peers while its low margin is mainly because the margin has been dragged down by increased SG&A related to acquisition. We think this number should be able to be reduced down as this company consolidates its management and operating to generate more saving from synergies.