value and opportunity

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).