Vetropack (CH0006227612) – Rock Solid Swiss compounder

Vetropack is one of the “Core Value” shares of my portfolio which I haven’t covered in detail yet.

Vetropack describes itself on its homepage as follows:

Vetropack is one of Europe’s leading manufacturers of packaging glass. With a rich variety of glass packaging products to offer the beverages and food industry, as well as a broad spectrum of services, Vetropack truly delivers “tailor-made glass”.

and:

This end-to-end service is the fundamental reason for Vetropack’s position as market leader in its six home markets, namely Switzerland, Austria, the Czech Republic, Slovakia, Croatia and Ukraine.

Based on “traditional” metrics, the stock looks OK but not “super cheap”:

P/B 1.25
P/E 2010 17.6
P/E 12M Trailing 10.4
P/E Graham (10 years): 13.5
EV/EBITDA 12M Trailing 5.1
Div. Yield 2%
FCF Yield (2010) 9%

No debt (95 CHF net Cash per share)
no intangibles

A quick view on historical earnings shows quite an impressive picture:

EPS BV/share FCF Share
1999 10.96 497.29 25.21
2000 36.58 510.66 92.28
2001 27.22 534.51 30.76
2002 59.78 578.15 -29.87
2003 91.03 681.03 120.04
2004 97.74 768.46 19.42
2005 119.10 909.37 85.48
2006 101.20 933.70 -22.48
2007 236.30 1,180.99 138.17
2008 182.55 1,243.69 105.58
2009 184.84 1,371.71 207.95
2010 91.24 1,283.77 155.84

We can clearly see the incredible rise in Earnings and Book value since 1999 until 2007, however in the last few years the picture has changed to a certain extent.

Looking at the Earnings developement in Swiss franks only shows part of the picture. Only 17% of Vetropacks sales are generated in Switzerland by the Swiss operations, 83% is outside Switzerland. Important: Vetropack does not export anything from Switzerland.

So if we look at peak Earnings in 2007 and compare them to the 2010 earnings, we should take into account that the 87% of Euro denominated Earnings have been reduced by a significant reduction in the value of the EUR against the CHF. Even more interesting is the effect on Free Cashflows:

FCF CHF FCF EUR FX Rate CHF/EUR
2007 138.17 83.56 1.65
2008 105.58 70.69 1.49
2009 207.95 140.16 1.48
2010 155.84 124.51 1.25
CAGR 3.2% 12.3%

Over the last 4 years, Cashflos in CHF have increased by 3%, the underlying EUR Cashflows by 12%, quite a difference. The currency movement also explains the lower book value in 2010 against 2009 despite the profit made.

So how can we value Vetropack ? If we look at the last 5 year free cashflows, we can see that the 2006 number looks quite odd, being negative. A quick glance into the 2006 annual report shows, that actually operating cashflow was strong but the company invested some extra amount in acquisitions and starting productions in contries like Slovakia.

So if we just take the average Free Cash flow of the last 4 years (which would be 150 CHF per share) and capitalise them at 10% we would end up with an intrinsic value of 1.500 or roughly 5% less than the current market price of 1.600 ChF.

Now we enter a difficult area for a contrarian investor: lower discount rates and growth.

If we just look at the following table where I simply discount the avg. Free Cash flow with various growth and discount rates (Discount rate X axis, growth : y axis)

7% 8% 9% 10%
1% 2,516.67 2,157.14 1,887.50 1,677.78
2% 3,020.00 2,516.67 2,157.14 1,887.50
3% 3,775.00 3,020.00 2,516.67 2,157.14
4% 5,033.33 3,775.00 3,020.00 2,516.67
5% 7,550.00 5,033.33 3,775.00 3,020.00

We can clearly see that for a margin of safety of 50% I would need to assume for instance a discount rate of 8% and a growth rate of 3%.

If history is any guide, Vetropack should be easily able to grow by 3%, having achieved much much mor in the past. Additionally, a 8% discount rate for a non-cyclical consumer product related company with net cash and an extreme conservative balance sheet should be reasonable.

Finally a quick check of the stock chart:

In 2008 the stock went down to almost 1.100 CHF, slightly below book value. Currentbook Value is around 1.300 CHF, so in a 2008 scenario we look at a 20% downside from here.

Summary: Vetropack is a stock with extremely strong historical growth, strong free cash flow generation and a rock solid balance sheet. Based on relatively conservative assumptions (3% growth, 8% Cost of capital), the current price would imply amargin of safety of almost 50%. If the stock should show some weekness in the next few days, I would actually be tempted to increase the allocation from the current 2.8% to 5% on acurrency hedged basis.

5 comments

  • Hello,
    I was looking at Vetropack just recently and got very confused with the numbers. The company’s shares trade atm at about 1600 CHF. According to the reports they have 233 837 bearer shares and 880 000 registered shares. Is the number of shares that one should use 233 837 (which equals to a market cap of about 382m CHF), or?

    Besides the number of shares, I’m also confused about the balance sheet and earnings numbers. In their reports they have Vetropack Group figures, and then later they have Vetropack Holding figures. Vetropack Holding is the one that trades, and it seems like you used those figures in your calculations as well (at least the book values it seems). But then again, there’s for example no cash flow statement for the holding company. Could you please try to explain which way is the correct on to approach these kind of companies? Which numbers do you do the calculations based on? Vielen Dank!

    • hi,

      re your questions: I always use consolidated Group figures, unconsolidated holding figures are meaningless.

      The registered shares are only 10 CHF par vs. 50 CHF for the bearer shares, so you should use 233.837 + (880.000/5) as total number of shares.

      mmi

  • Hi,
    I am not sure if you still read comments on old articles…

    I am looking at Vetropack and a german company KSB. Both are boring and solid.
    But in my opinion KSB performs better. It has better growth and more reliable cash flow.
    In my calculations FCF yield of Vetropack averages 6% over 10years while KSB has “only” 4%. But KSB is 3x cheaper so better.

    My question: did you buy Vetropack because it was cheaper than its peer group? Under what conditions would you buy KSB?

    • #stefan,

      no worries, I read all comments…

      KSB vs. Vetropack: In my onion, KSB is a good company and I actually owned it. However, I think that it is a cyclical company which profited a lot from the “”BRIC supercycle”. Many of KSB’s potential clients (mining companies, utilities) are in trouble and as long as I am not sure how that works out I will not invest.

      Vetropack is a lot less volatile. They do have issues with energy costs, but their sales are very stable as they are a supllier to the consumer industry (beer bottles). Additionally, Vetropack is actively buying back shares which is positive.

      To come back to your question: My rule of thumb is to buy highly cyclical companies only with very high or negative P/E so I think I would wait until they show a loss (and a hopefully low share price). Low P/Es at cyclicals are ususally a sign that bad times are ahead….

      mmi

  • Hi,
    I am sure your FCF is in fact EBITDA which is totally different number. According to my calculations e.g. in 2007 FCF was 61M CHF not 138. Probably it doesn’t change anything in your valuation.

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