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Share Price: 30 (July 11th 2012) Number of shares: 4,387,757 Market Cap: 132M EPS: 3.13 / Div: 0.91 Trailing P/E: 9.6 EV / EBITDA: 4.5 P/Book: 0.81 P/Tangible Book: 1.20 ROE: 8% Debt/Equity: 1,01 Current ratio: 1.18 Valuation: DCF method: 28.3 Tangible book value: 25 Net-net: No Reco: Hold, negative short term outlook
2011 Key Figures (M): Sales: 644 EBITDA: 54 CFO: 29 FCFF: -20 Net Income: 13 Equity: 161 Assets: 510 Financial debt: 163 Cash: 54
Strategic analysis:
5 Porters forces:
Bargaining power of suppliers: Bargaining power of buyers: Threat of new entrants: Threat of substitutes: Competitive rivalry:
Low because Fleury Michon is a very large buyer for pork producers. Very high because of the high concentration in distribution in France. Low because of the tight margins and high capital requirement: it is already a mature industry in France. High. High even if the strength of its brand helps.
Of course, vertical integration would make no sense to Fleury Michon (both forward and backward integration). Also, the French market is saturated. Remains three ways to add value to shareholders: 1. Improvement in production efficiency 2. Horizontal integration in foreign countries 3. Share buyback when market conditions are favorable
Hopefully, the management came to the same conclusion and undertook each of these three steps.
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Financial Analysis:
Evolution of Sales, Net Income, ROE and Debt ratio:
We can notice the steady growth of sales, the relative stability of net income and return on equity and the recent increase in debt-to-equity ratio.
As the Dupont analysis shows, the most critical part in the ROE breakdown is the EBIT/Sales ratio of 4% which leads to a very tight net margin of 2%. This tight margin mainly comes from the cost of goods sold which represents almost 50% of revenues, employee charges represent 25%. As we can see, Fleury Michon net income is highly dependent on commodities prices, pork bellies coming first. A 1% increase in COGS would result in a 13% decrease in net income if selling prices were not adjusted. Alternatively, if main commodities prices were to go down by 8%, net income would double. However, the selling price should offset the variations in commodity prices on the long run and the net profit margin should reverse to its mean.
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CFO: +29M CFI: -66M CFF: +31M FCFF: -20M Adjusted FCFF: 16M
As the above chart shows, the average price increased by 5.6% in 2012 compared to 2011 prices. This price level puts a huge downward pressure on 2012 operating margin. It seems that Fleury Michon share price does not reflect this recent surge in price levels.
There is no short term liquidity issue given the current ratio of 1.18 and a strong cash position (54M). LT debt increased by 40% from 88M to 124M in 2011 in order to finance fixed capital investments (mainly the production facility located in Cambrai, France).
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Governance:
Ownership:
Family shareholders: 69.3% Public: 19.8% Treasury stocks: 6.4% Employees: 4.4%
Board of Directors:
The board of directors is composed by 11 people and is renewed by third every year: 4 representing the family owners (among them the chairman of the board of directors) 5 totally independent members, elected for their expertise 2 representing employees shareholders
As we can see, corporate governance is considered seriously. The board of directors is independent and aligned with shareholders interests.
Insider Trading:
Magdelena Philippe, member of the board of directors: Sold for 272K in 2011 SHCP (represented by Gonnord Yves, member of the board of directors): Bought for 638K in 2011
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Conclusion:
We consider Fleury Michon to be a good company, well managed and working in its shareholders interests but operating in a competitive environment. The current 30 market price per share seems fair but does not allow for a margin of safety and our recommendation is then to hold. Everything else being equal, we would consider buying if the price was to fall below 25.
Author: Mehdi MEZIANE, Independent Financial Analyst and Portfolio Manager. Contact: mehdi.meziane8@gmail.com
Disclosure: The author of this analysis owns shares of Fleury Michon. This analysis includes personal opinion and should be considered as such. The author should not be held responsible for any financial losses incurred following decisions based on this analysis as well as for the accuracy of the figures presented.
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