Vetropack – Business model, Peer Group

After yesterday’s starting post for Vetropack, I would like to add some additional thoughts.

Business model & possible moat:
Vetrpopack basiscally produces glass bottles for beer, juice and softdrink companies. With all those beverages, usually both, the brewing and botteling part is done locally. Beverages esp. in glass containers are ussually difficult and expensive to ship, so especially the big breweries and soft drink companies produce everything locally.

The same applies for the glass containers themnselves , which are relatively cheap but expensive and difficult to transport. So somehow similar to a cement plant, someone with a local glass bottle production has a local natural cost advantage (“moat”) to competitors from geographically remote regions. The major difference to cement plants being the lower cyclicality of the business.

Peer Companies

I found the following companies which could be considered “peers” i.e. companies manufacturing glass packaging:

Vidrala SpA (Spain, glass bottles, very similar to Vetropack)
Gerresheimer (Germany, glass and plasticv bottles, more focused on pharmaceutical containers)
Zignago Vetro SpA (Italy, glass bottles)

Based on “simple” valuation ratios, the results look interesting:

Tkr & Exch Mkt Cap P/E P/B P/S EV/EBITDA T12M Net D/E LF
VET SW 650.8 10.40 1.23 0.80 4.46 0.00
VID SM 418.1 10.49 1.84 1.08 6.33 76.20
GXI GR 913.4 17.59 1.81 0.86 6.38 69.45
ZV IM 373.6 11.03 3.51 1.41 6.40 69.86

Although the P/Es are quite similar, all the other peers carry a significant amount of debt. This results in a singificantly lower EV/EBITDA multiple for Vetropack compared to its much more highly levered peers, which interestingly all trade around 6.4x EV/EBITDA.

EV/EBITDA is often used as a “proxy” for a private company valueation (Gabelli). Under this metric, Vertropack would be significantly undervalued compared to its Peers.

For me its not clear why the most solid company of the peer group should have the lowest relative valueation, in my opnion this should actually imply a premium.

Portfolio Management
As mentioned in the first post, Vetropack has currently a weight of 2.9%. As the cash balance in the portfolio is currently at the low end of the target (10%), I will either need to decrease another position or fund the increase through a short position.

My initial idea to create a pair trade between Vetropack and Gerresheimer (short) does not work to well. Correlations between the peer companies are extremely low (Vetropack against Gerresheimer for instance 0,24 for the last 12 months).

So before increasing the Vetropack position I will have to reduce other positions first.

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