MIKO NV (BE0003731453): Coffee and plastics – a tasty combination ?

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 ?

<

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).

7 comments

  • Hi,
    Thank you for the idea…
    However, I think there is significant risk in this investment. Coffee prices are at an all time low, equivalent to 2008/09 prices. Gross margins are 46% for the 1st half of 2013, the same is true for the first half of 2012 when prices were 38% higher. As you also mentioned gross margin from 2007-2012 has slowing been declining. Miko seems to be passing on the cost savings to the customers.. This is good, however it might not be an altruistic motive. More likely it is a result of competition. In the short/medium term I can see some the company doing okay. However, when commodity prices rise, it would be interesting to see if the company could pass the increased price to its customers. Good luck.

    • thans for the comment. 2 remarks: The first half 2013 includes acquisition costs which hopefully will be one time effects. Secondly. Clearly, Miko’s coffee business is not a high moat business with 100% pricing power. If you are looking for something like this, then look somwhere else. Miko is a “good” company at a very chea pric.Nothing more and nothing less.

  • stock is up 5% today, perhaps because of your article?

    I’ve actually been looking on and off at MIKO over the past years. Most recently I read the 2012 annual report just last week. They seem well-run, but I’ve never found something in the numbers that make it a screaming bargain at the prevailing prices. What held me back:

    – Commodity businesses

    – They diversify geographically by buying up smaller outfits in saturated markets, but unless they have a superior business model or economies of scale they won’t be able to gain above-market returns in those markets. I don’t see how they can create any synergies in their Australian subsidiary, for example. I don’t know enough about the coffee market to know when volume discounts kick in, but I doubt it really matters at MIKO’s small volumes.

    -Wrt lower fixed costs as % over time: in 2007 labor expenses were 23.9 on 48.7 (98.4-45.7) mln EUR net revenues (after COGS), or 45.3%. In 2012 labor costs were 30.7 on 65.4 (138.5-73.1) mln EUR or 46.9%. So if higher input costs are fully passed on to customers, labor is now taking a higher share of the remaining revenues.

    – I hadn’t thought about your projection of lower commodity prices going forward, but I don’t feel comfortable making these macro assumptions. Also, as a price taker on the output side they will have to lower prices when coffee prices go down.

    – Something i noticed only this year: the family holding company and a company controlled by another executive have lent MIKO 3.675 mln EUR <1 year credits, this year increased to 3.875 mln EUR. They describe the transactions as "arms-length" and the margin is EURIBOR + 2% (p 40, 79 and 85 of 2012 annual report in English). Interest rate is not excessive but it's still pretty strange.

    So all in all one of those companies that is perennially on my "watch list" at prices around 50/share, but where I've never pulled the trigger, always waiting for a drop. Somehow I missed the drop below 40 in 2008/9, otherwise I might have bought at those prices.

    Very interesting analysis though, I learned a lot from it, so thanks!

    Disclaimer: I work for one of the banks providing credit to MIKO, never come into contact with them however and I don't possess any inside information either (e.g. never done a credit analysis on them and I don't know which other products we sell them). A while ago I visited our bank branch in Turnhout (close to MIKO's HQ) and tasted Miko coffee though, it was quite delicious!

  • A competitor to Guillin.

    It seems you forgot to finish a sentence. What do you mean with that:
    “This means that no one of the currently 600k clients in Germany has ever traded that stock. Which ”
    You mean none of the 600.000 clients of DAB bank traded the stock? Why does that matter?

    My problem with the FCF is not that it was not constant – that the reson why one should look at several years, but that it is only 2 Euro per share over six years! (less than 2% yield), so the stock is not interesting for me at all, as I also do not like to buy stocks at all time highs, especially not now.

    • #winter
      thanks for the comment.

      600k clients: It is just one of many indicators for my hwo far “off the beaten track” a stock really is.

      FCF: Well, as mentioned, they invested a lot in hard assets instead of M&A. In 2013, FCF will bevery good because they mostly did M&A ­čśë

      All time high:This is in my opinion a typical bias: Anchoring. You should not care if it is ATH or not, as long as the stock is cheap.

      mmi

      • Yes, you are right, it would not be better if the stock was at an multi-year low.
        Nevertheless, I do not like to buy stocks right now when the stock market in general is at an all time high (well, not in France and generally not in Europe, but the world stock market, at least the leading market US) and when I expect a severe downturn. And if I buy stocks at all, then the ones which are not affected by the general stock market – and the ones which are at an ATH will supposedly also be affected by a crash.
        So, I would rather buy Poujoulat then MIKO. And I think that Groupe Guillin is a far better alternative and also one of the few stocks that I still own.

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