Sector financial performance:

This company, which mainly produces sustainable natural feed and food ingredients from animal and bakery by-products, has been grouped into natural ingredients sector of ingredients industry.

Feed ingredients are the major ingredients produced in this sector and have been competing with agriculture-based ingredients in price. Companies’ sales shrink as selling price decreased 7-13% in 2016 and 2015. It seems that demands for feed ingredients from animal and bakery by-products have been sustained by its competitively lower selling prices compared with agriculture based ingredients during this period as indicated by increase in sales volume while price kept low. The selling price went up in 2017 but down in 2018 again. Change in price and demand in this sector seems to be consistent with change in livestock industry. We need more time to observe if it will jeopardize the price advantage of this sector with alternative products of feed ingredients.

Companies have been able to keep its margins uncontaminated in adverse situation of price competition by passing the costs to its suppliers with their ability to negotiate the price of raw-materials. However, due to competition disadvantage to agriculture based feed ingredient producers they have to lower their selling price more than their agriculture competitors to boost their sales volumes. And the largely reduced prices lower the sales number to the point that their profits started to be impacted in 2018. In addition, since this is a low margins sector it is critical for companies to be smart in estimating the price of finished products in the market and managing their inventory. Predictions are not always correct obviously. This is why we see companies’ margins changes favourably for sometimes but unfavourably for other times. The current typical gross margin, operating margin, and cash flow margin are 21%, 13%, and 0.5%.

According our analysis, a typical ratio of enterprise price/adjusted EBI is 31 with 46% interest/EBI ratio.  

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Company performance:

As shown by data about the continuing increased sales volume (organic) in the past several years, it seems the demands for sustainable natural feed ingredients produced by this company have been strong, which may have been supported by lower price in 2015/16 and 2018 and by increasing demand from livestock feeding industry in 2017.  Price and thus demand seem to be directly related to livestock industry and other alternative ingredient such as agriculture based products. The company’s feed ingredient sales account for more than 60% of its total sales.

For the first nine months of fiscal 2018 compared with same period of 2017(20180929)

Organic feed ingredient sales (excluding currency) increased about 0% attributable to organic increase of 4% in sales volume offset by decrease of 4% in selling prices.

Food ingredient increased about 0%.

For fiscal 2017 compared with 2016

Organic feed ingredient sales (excluding currency) increased about 6% attributable to organic increase of 3% in sales volume and increase of 3% in selling prices.

Food ingredient increased about 10% due to increase in sales volume.

For the first half year of 2017, organic feed ingredient sales (excluding currency) increased 9% attributable to organic increase of 3.5% in sales volume and increase of 5.5% in selling prices.

For 2016, organic feed ingredient sales increased by about 1% attributable to an increase of 6.5% in sale volume offset by decrease of 7% in selling price.

Food ingredient decreased about 3%.

For 2015, organic feed ingredient sales decreased by 9% driven mainly by the decrease of 13% in selling price offset by increase of 4% in sales volume.

Food ingredient decreased about 12%.

Gross margin is usually easier maintained in this sector because companies are able to determine the price of raw –materials that they purchase according the selling price of finished products or anticipated selling price. Therefore, we see this company’ gross margin changed in a very small range between 21% and 22% ( before depreciation and amortization)  in the past four years primarily due to unexpected changes in selling price resulted from changes in price of agriculture based feed ingredients.

After depreciation and amortization (9-10% of sales as percentage, extreme large number) and SG&A (around 9% as percentage of sales) were deducted from gross profit, we see the relatively small operating margin of 3.5-4.5%  and cash flow margin of less than 1% that this company generated since 2014.

Stock price

This stock currently has an enterprise price/EBI ratio of around 31, which we think, is relatively undervalued under the consideration that there is signal that livestock demand may be picking up while accompanying with uncertainties in agriculture commodity’s price.