value and opportunity

In the fifth part of analysing the results of my Boss Score model, i want to look at the French company L.D.C. SA next.

The reason is not that LDC has the best score, but it is relativley comparable two 3 other companies I have analysed so far, Cranswick and French companies Tipiak & Toupargel.

According to Bloomberg,

L.D.C. SA processes and sells a wide range of specialty poultry products ranging from fresh prepackaged chicken to more elaborate prepared dishes. Those products are sold under brand names including “Loue,” “Bresse,” “Landes” and “Le Gaulois.”

So will French chicken be a good fit to British Pork ? Let’s look at traditional fundamentals:

Market Cap 690 mn EUR
P/E Trailing 12.2
P/B 1.1
P/S 0.2
EV/EBITDA 4.2
Debt/Assets 9.5%
ROE 9.5%
ROC 8.1%
Dividend yield 2.1%

At a first glance, relatively unspectacular. Not overly cheap but not expensive. EV/EBITDA looks attractive, almost no debt is normally a good sign. Market cap a little high but still ok.

What makes the company score quite well in my model is the very constant Comprehensive income yield on equity. This 10 year history:

	12M EPS	BV/share	Div
31.12.2002	4.19	33.50	1.15
31.12.2003	4.11	36.05	1.23
31.12.2004	5.48	42.288	1.15
30.12.2005	5.76	47.4188	1.25
29.12.2006	5.30	51.8404	1.25
31.12.2007	6.63	56.4853	1.25
31.12.2008	5.29	60.7223	1.50
31.12.2009	7.83	67.144	1.30
31.12.2010	5.9	71.1595	1.93
30.12.2011	6.97	75.8072	1.80

creates an average 11.5% CI Yield on Equity with only a 3.2% standard deviation.

Looking at some further metrics we can see that unlike Tipiak and Toupargel, LDC is growling nicely however margins have been eroding somehow since 2009:

	Sales p.s.	NI margin
31.12.2002	191.7	2.19%	10.69%
31.12.2003	186.4	2.21%	10.63%
31.12.2004	170.8	3.21%	19.07%
30.12.2005	193.2	2.98%	14.00%
29.12.2006	195.0	2.72%	11.43%
31.12.2007	226.8	2.92%	10.88%
31.12.2008	242.1	2.18%	9.36%
31.12.2009	256.6	3.05%	12.39%
31.12.2010	315.5	1.87%	7.69%
30.12.2011	342.7	2.03%	8.95%
avg		2.54%	11.51%

The stock chart shows a very boring but steady developement since 2004:

Beta to the French CAC40 is an incredibly low 0.46. 10 Year performance for the stock is 7.53% p.a. against 4.11 for the CAC

Business model:

Other than Cranswick, LDC is actually producing a significant part of their own poultry as we can read on their website:

Supply
The acquisition of Group Huttepain enabled the LDC Group to become closer to its farmers and make sure that they felt closer to the upstream part of the business. The companies belonging to Group Huttepain operate in cereal collection, feed manufacture and poultry farming (chicken, turkey and duck). This live poultry represents 55% of the group’s entire supply.

So as a first thesis compared to Cranswick I would argue that

– LDC should be more capital intensive
– more exposed to cost pressure (animal feeds)

than Cranswick.

So let’s have a quick look at some capital metrics:

	Cranswick	LDC
	2010/2011	2011
Sales	758.3	2,774.0
NI	35.3	56.7
NI in %	4.7%	2.0%
Inventory	35.7	178.3
Receivables	78.7	343
Trade liabil-	-84.9	-308
Net WC	29.5	213.3
In % of sales	3.9%	7.7%
PPE	123.3	421.6
in % of sales	16.3%	15.2%
Goodwill	127.8	164.1
Net WC+ PPE in % of sales	20.2%	22.9%
Net WC +PPE+GW in % of sales	37.0%	28.8%
Inventory / Sales	4.7%	6.4%
Depr.	12.44	80.9
Depr /Sales	1.6%	2.9%

So we can see that Cranswick is better in working capital management, whereas LDC has slightly less PPE than Cranwick. interestingly, LDC deprecates a lot faster than Cranswick, almost a fifth of their PPE whereas Cranswick deprecates a tenth of PPE.

This faster depreciation explains 1.3 % of the Margin difference.

Some other notable differences are:

– LDC has to spend ~22% of sales on salaries vs. 13% at Cranswick, so LDC’s business model is clearly more labour intensive.

Due to the significant depreciation, LDC’s Cashflow before investments is around 2.3 times net income compared to Cranswick’s 1.2 times. However LDC is investing back all the depreciation plus some into the business. This explains the tripling of sales over the last 10-12 years, however at a decreasing rate of return on capital.

Similar to Cranswick they move strongly into processed and packaged food.

Looking at the English language annual comments, the processed food part seems to be in difficulties (same as Tipiak and Toupargel), whereas the Poultry business itself seems to run quite well. Representing around 20% of sales, the convenience food actually produced a loss.

Unfortunately, they do not publish segment numbers, so we do not know how much capital is used by the convenience segment. However my assumption would be that the “pure” poultry business looks a lot better stand alone and might be comparable to Cranswick’s.

management & Shareholder structure

The company is majority owned by a couple of families, with the executive board recruiting only members form the different families. This is not necessarily bad, but implies that there will be no real change going forward.

Value Shop Sparinvest has a little position as well.

Summary:

LDC SA is a very steady company with a rock solid business model. Unfortunately,the convenience food business seems to be in some kind of trouble. Stand alone, the company looks interesting as a very defensive “Boss” investment, but in comparison to Cranswick it looks like the inferior business.

The company seems to “overinvest” especially looking at the diminishing returns on capital in the past few years.

For the time being, I will not invest but put it on my watch list. If they manage to turn around the convenience segment, I might consider an investment.