Update: Vetropack (CH0006227612)

Vetropack just released 2013 numbers and the annual report yesterday.

All in all, things don’t look so great. Sales increased 2%, however EBIT margins declined and net income declined significantly as the one-off gain from a property sale in 2012 could not be repeated. EPS (undiluted) was 137 CHF per share.

A quick reminder here: Vetropack reports in CHF but the majority of sales are non-CHF. In 2013, the Swiss frank depreciated against the EUR, so all things equal, even with constant EUR sales, Vetropack would show increasing CHF sales.

The stock market seems to have been expecting more, the share has dropped significantly over the last few week:

The biggest problem for Vetropack is clearly Ukraine, where they had ~15% of sales in 2013. They do not provide profits for their subsidiaries, so we do not know which margins come from what country. But clearly, with the currency devaluation (~-50% since the beginning of the year), in the best case, sales from Ukraine (and profits) will be -50% lower in 2014 than in 2013 just from the currency effect.

Looking into the 2013 annual report, we can see that most other subsidiaries are stagnating or only growing very slowly. interestingly, if we compare 2013 with the 2008 report, we can see that especially Switzerland has disappointed, with sales now -20% lower in 2013 than in 2008. Somehow, the increase int he Swiss franc seems to have been a big problem.

All in all, things don’t look very good. This is reflected also in the current valuation. At the current share price of ~1570 CHF, P/B is almost exactly 1, trailing P/E 11,4 and the dividend ~2,4%.

The only bright side was that cashflow looked rather OK in 2013. Operating CF of around 100 mn CHF minus Capex of 50 mn is ~50 mn free cash flow which has been distributed to shareholder to a large extent via divdends and teh stock repurchase last year. Net cash went down but this seems to be the result of a “Non core” purchase of a real estate company which came with some real estate loans (note 26 annual report). I would therefore exclude the 20 mn real estate debt from EV as the acquired assets are “extra assets”, not required to run the business.

Valuation & Competitors

That’s what i wrote back in “the old days”:

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.

This was based on 150 CHF free cash flow per share. 2013 FCF per share was around 122 CHF per share. So first mistake: Free cash flow did not increase by 3% from 150 CHF but did actually contract. Secondly, I used 8% as discount rate. As we see now, Vetropack’s regional exposure does not really warrant a lower discount rate than my simple 10%. So second mistake: The 8% discount rate was much too optimistic for a company with signficant “emerging markets” exposure.

If we look at the peers, both Zignano and Vidrala have been doing much better, at least over the last 2 years:

Both trade at siginficant higher valuations. Zignago at 20x trailing p/E, 8,5 EV EBITDA and 4,6x book, Vidrala at 18xP/E, 3x book and 7,8 x EV/EBITDA. MArgins are not that much higher for Zignago and Vidrala, but Return on invested capital (including debt) looks better. ROE anyway as both competitors use leverage. Both peer companies, despite being based in “PIIGS” countries managed to grow their top line better than Vetropack. Vidrala has grown sales by ~25% since 2008, Zignago by around 20%. Vetropack in comparison has grown sales (in EUR) since 2008 only by 15%, net income went down -10% vs. 2008.

But: Also for Zignago, net income went down -20% since 2008, only Vidrala could actually increase net income (after a small dip in 2011 and 2012). Although they seem to do almost all of their business in crisis ridden Spain, Portugal and Italy. So Vidrala clearly shows that you can do a solid job in this business even under adverse circumstances. Although valuations look stretched for both competitors.

Back to Vetropack: Starting with the current variables (1.575 CHF per share, 125 CHF FCF), I would need at a 10% discount rate ~4,5% FCF growth per annum to give me a 50% upside. This is clearly not going to happen soon. On the plus side, the downside is well protected via the (conservative) tangible book value which will most likely grow by mid single digits going forward.

So at the moment, I do not see a big upside or under valuation for stock, taking into account the higher risk profile of the stock.

The upside could come back, if Ukraine gets solved quickly and a lower discount rate could be justified. Another positive could be somehow lower costs but I would not rely on this. Finally, if they continue to buy back shares, then we could also see improving metrics per share but they didn’t announce anything yet.

What to do now ?

I am a little bit uncertain at the. I think I made a mistake in the beginning by using a discount rate which was too low and did not reflect the geopolitical risk profile of their subsidiaries. Now however, the Ukrainian risk seems to be priced in already to a large extent. As I am somehow more sympathetic to Emerging Markets in their currently depressed state, I am tending to keep Vetropack as a partial “Emerging markets / Ukraine bet” for the time being.

However, if I would find more and better EM bets, I might sacrifice Vetropack at some point in time.

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