value and opportunity

DISCLAIMER: The stock discussed is a relatively illiquid small cap. The author will most likely own the security already before posting any analysis. This is not an investment recommendation and reflects the personal (biased) opinion of the author. Please do your own research.

Miko NV is a Belgian company, which has been lying on my “reasearch pile” quite some time.

However, a few weeks ago when I read the news that the Benckiser heirs were acquiring Coffee company DE Master Blenders for 7.5 bn EUR (2.6 times sales, 27 times book, 23 times EV/EBITDA), I decided to look at them next.

Miko’s traditional numbers look Ok, but not spectacular

Edit: I wrote the post last week, a few days ago for some reason the stock price jumped significantly. I did not update the numbers. The analysis is based on a stock price of around 57 EUR.

P/E 10.5
P/B 1.1
P/S 0.5
Div. Yield 1.9%
EV/EBITDA ~5

At a first glance, their core businesses look like a very odd combination. 50% of sales are coffee related, 50% is plastic packaging for food and cosmetics.

This is how they explain it on their website:

Out of the coffee roasting department, which in 1958 launched the one-cup coffee filter, and which as such acquired significant expertise in the area of plastics, the second core activity of the Miko group developed itself next to the coffee service division, namely plastics processing.

The company looks quite well in my BOSS model, because in the past they have shown consistently double-digit ROEs and ROICs, together with nice growth:

	NI margin	ROE	Sales per share	FCF per share
31.12.2002	5.0%	21.7%	55.2591
31.12.2003	5.2%	21.1%	59.346
31.12.2004	5.2%	17.5%	61.1627
30.12.2005	5.3%	16.0%	67.2204
29.12.2006	5.4%	15.6%	73.2292	-0.5172
31.12.2007	5.5%	15.0%	79.3292	-0.0121
31.12.2008	3.9%	11.5%	90.1941	-2.6932
31.12.2009	7.2%	18.5%	89.0562	10.4591
31.12.2010	6.5%	15.3%	94.8683	1.4043
30.12.2011	4.3%	10.0%	104.8493	-2.5251
31.12.2012	4.6%	10.6%	111.4887	#N/A N/A

However we can see 2 issues in this time series:

a) ROE’s declined to ~10% and net margins to < 5% in 2011 and 2012
b) Free cash flow looks very "Lumpy"

Lets tackle the first one: Why did margins and ROE decline in 2011 and 2012 ? Well both, the plastics division and the coffee division share that they depend on "commodity input". The coffee segment clearly depends on coffee prices, the plastic segment on the price of plastic granule which itself depends on oil price and energy costs.

This is a table how the price of raw material developed in comparison to sales:

	Raw materials /Consumables	Total sales	In %	Net Margin
2006	40.7	90.6	44.9%	5.4%
2007	45.7	98.4	46.4%	5.5%
2008	53.9	113.0	47.7%	3.9%
2009	49.6	111.0	44.7%	7.2%
2010	57.2	117.8	48.6%	6.5%
2011	69.4	130.2	53.3%	4.3%
2012	73.1	138.5	52.8%	4.6%

So we can clearly see that input costs compared to overall sales increased quite significantly over the last years. But we can also see that at least in 2009/2010 they seemed to have been able to compensate for the rise in input prices. nevertheless it is interesting to see, that despite almost 9% increase in input prices, they manage to squeeze out more or less the same margin as in 2007. Why so ?

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	2007	in% of sales	2012	in % of sales	Delta % of sales
Other (pos)	1.8	1.8%	2.7	1.9%	0.1%
Raw material etc.	-45.7	-46.5%	-73.1	-52.8%	-6.3%
labour	-23.9	-24.3%	-30.7	-22.2%	2.1%
Depr.	-6.3	-6.4%	-7.8	-5.6%	0.8%
other	-17	-17.3%	-20.8	-15.0%	2.3%
financial	-0.1	-0.1%	-0.6	-0.4%	-0.3%
Taxes	-1.5	-1.5%	-1.7	-1.2%	0.3%

This table shows the “composition” of the cost base 2007 vs 2012. We can see clearly, that input costs have increased relatively to sales and quite dramatically so. On the other hand, the growth of the company seems to have produced good economies of scale effects. Labour percentage is down, depreciation and other costs.

So we can see that we have a company here which is clearly a price taker to a large extent, but was able to grow quickly enough in order to realize economies of scale and keep the margins more or less constant. This means that management has done a good job and can grow while at the same time control costs. I see that as a huge plus and a sign for good management.

Lumpy free cashflows

In today’s investment world, investors want to see a smooth increasing figure for free cash flow per share. I have written about this quite often. But in reality, for a “normal” company, free cash flow is anything but smooth. A real “traditional” company will buy or build a long-term asset, sand depreciate it over a certain amount of time and then buy the asset again etc. Naturally for a traditional company, free cash flow will be lumpy, unless it is “managed”. Operating leases for instance are a management tool or M&A activity. Personally, I can live with “lumpy” free cash flows. At Miko, they clearly are not “managing” this because it think the majority family shareholders are not too interested in such an exercise.

The core Coffee business

Their core coffee business is relatively straight forward. They install and service larger coffee machines in offices and bars/restaurants including additional supplies like roasted coffee, milk, sugar, cookies. They do not produce coffee machines themselves, also the technical service is outsourced to a partner. However they do lease them out if required. So once they have got a contract, it seems to be a nice “recurring” business although they are clearly not the only company offering it.

When they expand internationally, they usually buy a local company and then expand on that basis. In the last few month, the bought in this fashions small existing companies for instance in Denmark and Sweden.

Qualitative aspects / checklist

The score in my checklist is a good 19 (out of 28), at the same level as for instance G. Perrier or Tonnelerie. Highlights are

+ small market cap 71 mn and only 1 analyst following company
+ 55% Family owned via 2 holding companies
+ unusual feature of 2 very different businesses in one stock (investors prefer “pure plays”)
+ potential catalyst for higher margins: Lower coffee prices
+ solid balance sheet, no significant pensions, low debt, low operating leases
+ straight forward reporting, no fancy “adjusted” numbers
+ the company operates over a diversified region (Belgium, UK, Germany Poland)
– not actively shareholder oriented (no buy backs etc.)

An interesting soft factor is the fact that the stock cannot be traded at one of my two brokerage accounts (DAB Bank). This means that no one of the currently 600k clients in Germany has ever traded that stock. Which

Valuation:

My BOSS model (which I don’t take to seriously in that regard) says the shares have an upside of 75%-150%. With a more simple approach I would assume the following:

Both, the coffee service and plastic packaging businesses are “above” average businesses. An “average” business for me would justify a PE of 10, an !above average” like those two something like 12-13 times. On top, MIKO has demonstrated that it can grow and compound in both areas. This is also something one should not pay for explicitly but factor in. All in all, for me a P/E of 15 or EV/EBITDA of 7-8 would be not totally unreasonable.

Based on this, I would see an upside from the current share price of ~30-40%. The downside risk in my opinion is relatively limited. Miko never traded below book value since its IPO, so the current 1.1 P/B seems to be comparably cheap.

Overall I would rate this as buying an above average investment at a below average price.

Stock price

The stock price looks quite interesting. The current price is approaching the all time high from 2007/2008. In comparison to now, Miko then was valued at around 13-14 trailing P/E, so around 30% higher than today. I am not a chartist but if they actually manage to crack this ATH, this is normally a good sign.

Timing & oither considerations

An important question to keep in mind is the following: Would I buy this stock also now if I would not sit on a pile of cash ? The answer is yes, I would even buy it if I were 95% invested or I would also be prepared to sell lower conviction stocks like SIAS for it.

The reason is the following: As discussed earlier, I am not really positive on BRIC and commodity prices in general. So I stay away from anything which profits from increasing commodity prices. MIKO, on the other hand benefits from a decline in commodities, especially coffee.

This is the coffe price chart over the last 15 years:

This illustrates quite well, how unusual the 2011-2012 period was. SO I do think that there is a good chance that we can see improved margins in the coffee business, starting already in 2013. The sole analyst covering Miko is actually expecting 7 EUR Earnings per share for 2013 and 8 EUR for 2014. I don’t think it will be that good, but nevertheless it looks like a good time to buy into Miko.

Miko is in my opinion an interesting stock because it doesn’t fit in most “value” categories. It is clearly no “wide moat” company, it is not a “bargain” nor will it show up on a lot of classical value screens. Also those investors who want (or need) a high dividend yield will not consider the stock However, as a new member of my “boring but sexy” quality stock portfolio it is a very interesting “off the beaten path” addition.

Summary:

Miko fits nicely into the type of stocks I am looking for:

+ it is small, unspectacular family owned company followed by only one sole analyst
+ the underlying two businesses are stable, solid balance sheet, good management
+ the company should be able to compound at 10-15% ROE for quite some time
+ there might be a small “catalyst” with increasing margins in the coffee business dut to lower input prices
+ geographically it nicely diversifies vs. my France/Italy holdings (mostly Belgium, UK, Germany, Poland)

I therefore establish a “half” position at 58 EUR per share (see disclosure above).