Sector financial performance:

This company, a distributor of food to food service industry including independent restaurants, chain restaurants, healthcare and educational facilities, or/and hospitality, has been grouped into food service distributor - broadline sector.

This is a sector with intensive competition and highly market concentration that enables companies to take advantage of economy of scales and supply chain efficiency.

It seems the demand from food service in US market has been strong and growing in the past four years as indicated by our data of case volumes (increased at annual average rate 3%) but there is a signal indicating that the growth may be slowing down since 2018. It seems the increase has been driven mainly by the recent recovery of independent local restaurants sector and its increased merger& acquisition activities. Data indicate that demand from chain restaurants presented downward trend in 2015-2017 and played less important roles in generating profits for companies since they provide usually smaller gross margins compared with serving for local independent restaurants.

Benefiting from strong demand from food services and improved gross margins, companies have experienced increase in their profits while the volatile supply price of food, which are not easy to be passed on to customers.

A typical gross margin for companies in this sector is around 19% with around 15% SG&A spending as percentage of sales. Some relatively smaller distributor has much lower gross margin ( around 13%) with less spending on SG&A as percentage of sales of 12%. It seems economy sales and the relative efficient matter in companies’ margins. Therefore, their operating margins usually vary from 1.5% (smaller company) to 4%.

According our analysis, there is a large span between companies’ enterprise price/adjusted EBI from 27with interest/EBITDA ratio of 15%. 

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Company performance:

It seems the demand from US food service industry has increased between 2016/17 as recovery from independent restaurants as a result of increased mergers after. However, the growth in volume counts seems to pause in 2018.  Food price demonstrates volatility.  

For first three quarters of fiscal 2018 compared with same period of 2017(ended 20180929)

Organic sales (excluding impacts of acquisition) of this company decreased about 0.8% attributable to decrease of 1.9% in case volume and increase of 1.2% in overall rate per case.

For fiscal 2017 compared with 2016

Organic sales (excluding impacts of acquisition) of this company increased about 3.8% attributable to increase of 1.7% in case volume and increase of 2.5% in overall rate per case.

Organic sales (excluding impacts of acquisition) decreased about 0.7% in fiscal 2016 compared with 2015, attributable to increase of 1.6% in case volume and decrease of 2.3% in price.

Organic sales (excluding impacts of acquisition) decreased about 1.1% in fiscal 2015 compared with 2014, attributable to decrease of 0.5% in case volume and decrease of 0.6% in price.

This company’ gross margins as percentage of sales has been improved from 16.5% of 2014 to 18% of 2018 as a result of decreased food price from supply side. During the same period, its operating margin keeps the same upward trend from 1.1% to 3%. With the general increase in sale volume and improvement in margin, its operating income has increased in the past three years.

Stock price

This stock currently has an enterprise price/EBI ratio of 25, which we think, is relatively overvalued consider that it is the first company in this sector who had experienced decrease in sales volume in 2018.

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