Sector financial performance:

This company, which primarily manufacture condensed and ready-to-serve soups, broth& stocks, sauces, vegetable beverages, and baked snacks, has been grouped into simple soups sector in food industry.

Our company data indicate that demand for soups and vegetable beverage may be declining currently as indicated by the decline in sales volume accompanying decreasing price based on data of some typical company in this sector in 2017/18. A downward trend on demand has been seen in this sector for several years and companies have experienced increasing pressure on their profitability when dealing with increasing costs in such an unfavourable market. One of the proofs is that when companies tried to raise products’ price in 2016 as a response to inflation of costs the sales volume started to drop. In order to support declining demand, in the past two years companies in this sector have to lower its price/promotion, at huge cost of profitability, to stimulate demand.

Therefore, companies have had to turn to raise productivity to offset the increased costs and decreased price. A typical gross margin for companies in this sector is around 32-33% with 18% SG&A spending as percentage of sales. Therefore, they usually have operating margins of 13-14%.

According our analysis, a typical ratio of enterprise price/adjusted EBI is 29 with interest/EBI ratio of 25%.  

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Company performance:

It seems the demand for this company’s soups and vegetable beverages has been weak in the past several years as indicated by the decreasing sales volume data and its sensitivity to raising price. The decline in demand was not able to be supported by lower price and promotions in 2017/18.

For fiscal 2018 compared with 2017(ended 20180729)

Organic net sales for soups and vegetable beverages decreased 4% attributable mainly to decrease of 3% in volume/mix (soup and V8) and decrease of 1% in price. At the same period of time, organic net sales for baked snacks increased 2% due to increase 1% in both volume and price.

For fiscal 2017 compared with 2016(ended 20170730)

Organic net sales for soups and vegetable beverages decreased 1% attributable mainly to decrease of 1% in volume/mix (V8). At the same period of time, organic net sales for baked snacks were flat.

Organic net sales of soups and vegetable beverages decreased 1%, attributable to promotions spending in the first nine months of fiscal 2017.

Organic net sales for soups and vegetable beverages decreased 1% in 2016 compared with 2015, attributable mainly to decrease of 2% in volume/mix offsetting by increase of 1% in price. At the same period of time, organic net sales for baked snacks increased by 2% attributable both increases in volume and price.

Organic net sales for soups and beverages have no changes in 2015 compared with 2014, reflecting a 0% increase in volume/mix and a 0% increase in price. Organic sales for baked snacks increased 3% at the same period of time including a 2% decrease in volume and 1% increase in selling price.

The gross margins as percentage of sales increased from about 34% of 2015 to 39% of 2017 as a reflection of improvement of productivity offsetting by inflating costs. However, the gross margin then went down to about 32% in 2018 due to increasing production costs and acquisition related costs offset by improved production efficiency. Correspondingly, further due to improved SG&A spending, its operating margin increased from 14.6% of 2015 to 21% in 2017. However, the operating margin down back to about 13% in 2018 when both gross margin and SG&A% move to unfavourable direction.

This company gained a positive organic increase in its operating income only in fiscal 2017 attributable to improved gross margin with flat sales volume. And its operating income down significantly in 2017/18 due to decreased margin and sales.

Stock price

This stock currently has an enterprise price/EBI ratio of 29 ($40/share), which we think, is relatively overvalued considering the downward trend in demand and the possibly further increase in costs.