Boss Score Harvest part 4: Tipiak SA (ISIN FR0000066482) & Toupargel (ISIN FR0000039240)

Back to the micro level ;-). Let’s jump back over the channel from Dart Group, Braemar and Cranswick to France.

Tipiak is a French Company which according to Bloomberg does the following:

Tipiak SA manufactures and distributes frozen food, prepared dishes, grains and sauces in France and abroad. The Company’s products are marketed under the “Tipiak” and “Relais” names.

So its basically the French version of Frosta AG, the company I used as Benchmark for Cranswick.

The company looks cheap under standard metrics:

Market Cap 32 mn EUR
P/B: 0.7
P/S: 0.2
P/E 2011: 10.1
P/E 2012 (est): 6
Dividend yield trailing 8.5%
EV/EBITDA 4,5

In the Boss model, they show an average ROE of 16% over the last 10 years with a standard deviation of only 6.6%, which puts them in the absolute “top decile” in the database.

However if we look at the “Boss ROEs”, we can quickly see that this is a company where things deteriorated significantly in 2011:

Boss ROE NI margin
2002 14% 1.7%
2003 15% 1.7%
2004 31% 3.1%
2005 19% 3.7%
2006 21% 2.9%
2007 19% 3.8%
2008 12% 2.9%
2009 12% 2.7%
2010 14% 2.8%
2011 6% 1.9%

The stock chart shows a pretty alarming picture:

So this is definitely a warning sign at first glance.

A quick look in to the French annual report 2011 shows that the reason for the decline in profits is mostly a relatively strong increase in costs across all categories which could not be compensated through the increase in sales. Somewhere hidden in the annex they show that the reserves for doubtful receivables on outstanding receivables have increased from 2% of outstanding to 4% which explains around half of the decrease in profits.

As we had checked Cranswick and Frosta with regard to capital management and capital efficiency, let us quickly check how Tipiak looks there:

2011 2010 2009
Sales 167.6 158.1 154.6
NI 3.2 4.5 4.2
NI in % 1.91% 2.85% 2.72%
 
Inventory 19.8 18.6 15.9
Receivables 50.1 47.1 48.3
Trade liabil- -27.6 -27.8 -27.2
 
Net WC 42.3 37.9 37
In % of sales 25.24% 23.97% 23.93%
 
PPE 44.6 45 45.3
in % of sales 26.6% 28.5% 29.3%
Goodwill 6.9 6.9 6.9
 
Net WC+ PPE in % of sales 51.85% 52.44% 53.23%

Short answer: Bad news.

Both, working capital and fixed investments in comparison to sales are higher than at Frosta (25% WC vs. 20%, 27% PPE against 21% at Frosta) and miles away from the efficient capital management at Cranswick. Interestingly, in one of his many writings Warren Buffet warned that companies with high working cpital requirements are suffering most from inflation. This is what one can see live at Tipiak.

So without digging deeper: Tipiak might be a “reversion to the mean” play at some point in time but at the moment it is a business in trouble and not what I am actively looking for.

To make this post a kind of “French frozen food” edition, lets look at another company as well, Toupargel Group SA.

Toupargerl has a slightly different business model:

Toupargel Groupe specializes in the home delivery of food products to individuals. The Company operates through two segments: Frozen Foods and Fresh Foods & Groceries. Toupargel Groupe is based in France.

Toupargel also looks “suspiciously”cheap:

Market Cap 75 mn EUR

P/B 0.9
P/S 0.2
P/E (2011) 9
EV/EBITDA 2.9 (!!!)
Div. yield 5.5%

The stock chart looks similar bad like Tipiak’s:

Average “Boss ROEs” and NI margins are higher than Tipiak but also more volatile and declining as well:

Boss ROE NI margin
2002 20.6% 1.7%
2003 44.7% 1.7%
2004 43.0% 3.1%
2005 34.2% 3.7%
2006 18.0% 2.9%
2007 17.7% 3.8%
2008 20.3% 2.9%
2009 23.0% 2.7%
2010 15.4% 2.8%
2011 13.0% 1.9%

Still this would result in an excellent score overall.

A quick view into the business developement looks impressive but only if one reads it from the wrong side. according to the annual report, sales and profits are shrinking almost every year since 2006.

According to their annual report, they are a clear market leader in the French market, but it seems to be that the market is shrinking as well.

Just for fun a quick look at capital usage:

Toupargel    
  2011 2010 2009
Sales 339 351 359
NI 8.1 12.9 12.9
NI in % 2.39% 3.68% 3.59%
 
Inventory 12.6 11.6 12.2
Receivables 2.9 1.7 1.8
Trade liabil- -23.6 -22.6 -22.4
 
Net WC -8.1 -9.3 -8.4
In % of sales -2.39% -2.65% -2.34%
 
PPE 43 46 47.6
in % of sales 12.7% 13.1% 13.3%
Goodwill      
 
Net WC+ PPE in % of sales 10.29% 10.46% 10.92%

And surprise surprise, they manage to run their business with negative working capital !!! Overall capital requirements are very low which explains the historically strong ROEs.

The reason is also relatively clear: Like a super market, Toupargel distributes directly to retail clients against cash, but enjoys the usual payment terms from its suppliers. So capital wise this business model is much nicer than being a supplier to a supermarket etc. but it seems to be that despite the internet boom, frozen food home delivery has seen its best days in the past.

Summary:

Both companies show, that of course the “Boss Score” is not the perfect model for each and every situation. As with every mechanical screener one has to be carefull not to get sucked into value traps.

Of the two companies, Toupargel seems to have the more capital efficient business model, but unfortunately the business model looks like terminal decline. If they manage to reinvent them somehow (Internet ?) they would be however a prime turn around story. But so far both companies do not qualify as “BOSS” (boring sexy stock).

8 comments

  • Hi MMI,
    this inventory seems to include (my french is bad):
    -raw materials
    -work-in-process (WIP)
    -finished goods inventory
    WIP can be estimated as constant for constant capacity utilisation. But raw materials and finished goods inventory fluctuate. (For low logistical cost you have to sell full truckloads and I don’t know which amounts are cheap to purchase. Maybe they buy some raw materials only once a year when price is low?) We have just a snapshot at the same point in time every year. Is this eben near the average inventory for the whole year?

  • Hi Martin,

    those are 2 sides of the same coin. Yes, they cannot pass higher prices on to clients. But on the other hand, costs rise (among others) ecause of high inventory.

    For a frozen food manufacturer, storing raw material and finished products etc. requires among others a lot of energy fr freezing the stuff.

    the more inventory, the larger the wwarehouse the higher the cost. Relatively simple.

    mmi

  • In the aggregate this may be right. But inflation is macro und the actual inflation rate for every person and company differs from this aggregate inflation rate.

    You have to identify the main cost drivers and simulate the impact of correspondent inflation rates and you have to compare this to competitors and analyse the pricing power.

    For Tipiak in my opinion the problem in 2011 was not inflation but their pricing power as increases in purchase price of key raw materials lead to weaker results.

  • Hello
    Very interesting, I regularly fall into value traps and hopefully I learned something with this post. Could you calculate the BOSS score for Tessi (ticker : TES), when you have the time ?

    • Hi caque,

      Tessi doesn’t look bad. The model would justify 3.2 times book value or around 100 EUR. Howver, there are a lot of stocks which score a lot better.
      MMI

  • Hi AS,

    a good long article about inflation is here:

    http://www.valueinvesting.de/en/inflation-equity-investor-by-warren-buffett.htm

    Simply speaking, investory will have to be replaced by more expensive inventory pretty quickly and leaves less money to be invested in more productive assets.

    A company like Tipiak will therefore see its cost increase a lot quicker than for example Cranswick.

    MMI

    • when the sh… hits the fan:

      Toupargel seems to have distributed horse meat lasagne. From the preliminary annual report:

      Crise de la viande de cheval
      Deux références de lasagnes Toupargel étaient potentiellement touchées par une présence de viande
      de cheval. Tous les produits ont été immédiatement retirés de la vente. Le système de traçabilité a
      permis, en quelques heures, d’identifier et de contacter individuellement les 6500 clients concernés
      pour les rassurer. Le retour de nos clients a été très positif et démontre l’avantage concurrentiel de
      Toupargel en cas de crise de ce type.

  • interesting that you have done a first dd on Tipiak… i follow the company now for some years…. I´m right now buying because i like the company and how management (like a family) is developing the company… great dividend every year…
    2011 was weak… but better than expected
    could you please give me a better understanding why you think they will be weak in inflationary times?
    thanks

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