The content here is for informational purpose only, and should not be taken as legal, business, or tax advice, or be used to evaluate any investment or security, and is not directed at any investor or potential investor in any AlphaSwap podcasts.
Khing:
Hello, and welcome, everyone. I'm Khing Oei, and this is the AlphaSwap Podcast. Every week we will be discussing a top investment idea from the platform, and have an in depth conversation with a user who posted the idea. You can learn more, and join our community, at AlphaSwap.io.
Hi everyone. Welcome to the Top Three Ideas Podcast, presented to you by AlphaSwap. This week we're talking to Yusuf Samad.
Yusuf, how are you doing? Can you start off by giving us a quick introduction of yourself?
Yusuf Samad:
Yes, sure. So, I'm a private investor now. I manage my own pension fund. I also advise a family office on private equity, and equity investments. My career has been more institutional, so I am an independent trustee to the Sodexo Pension Fund, which is about 700 million pound scheme in the UK, and I'm on the investment committee there.
My background is about 40 years of experience in international banking. I was with CitiBank for 25 years. I have had investment consulting experience, again, advising UK pension funds. And finally, I've actually been a portfolio manager. So for the last, I would say, six years, I was at the Pension Protection Fund, which is a 35 million fund, and I used to manage the private equity, alternative credit, and global real estate portfolios.
Khing:
Excellent.
Yusuf Samad:
So I have broad experience in finance, banking, and investments.
Khing:
Great. Thanks very much for being here today, Yusuf. So which stock are you going to talk about today? And what's the trade in a nutshell?
Yusuf Samad:
Okay, but perhaps I could kick off with a little bit first of all, my investment approach, and then lead into it. So, my approach has been very fundamental. So I try understand a business, and try to get to the intrinsic value, and buy something below intrinsic value.
For example, obviously, the razor and blade type of model I like. I do believe that markets apply a broad brush approach, and they tend to throw out good stuff with the bad stuff. Or sometimes they lift up the bad stuff with the good stuff. So that gives you the opportunities to buy, so I look for the situation when there is some sort of disruption in the business, either market-wide or idiosyncratic. And as you well know, the COVID crisis, or the Brexit, for example, has thrown up lots of these opportunities. This is interesting because my approach is to see what has gone wrong before I know what needs to get fixed. Can the company fix it? Can it survive? So one of the big plays I have right now is around strong balance sheets that will survive. The NN Group is another one of my recommendations on AlphaSwap is there.
Coming to this particular stock, I picked a Spanish food company called Ebro Foods. And this has come out of another focus I have, again, in my investment approach, in European small and midcap companies.
So over a year ago I decided to focus on this space in the belief that it tends to be under-researched and ignored by institutional investors. [inaudible 00:04:01] growth companies. And people think of Europe as low growth. I know that from my institutional experience, both in the trustee and the portfolio manager space. So there are some great companies in Europe that produce fantastic goods and services, and dominant players internationally and domestically. And the other interesting piece is that they are often family owned, founder run, so you have good alignment with the management. So following that theme I picked, this year, I met, in February 2020 before the crisis, I found Ebro Foods. So Ebro Foods, what is Ebro Foods? This is a listed company in Spain. Market cap 3 billion Euro. And it is the global leader in the production and distribution of rice, rice-based products, and sauces, and the second largest pasta manufacturer in the world. It's amazing that you should find this in Spain. The business is family owned. Almost 70% of the stock is held by four or five large, well-established Spanish families, of which 16% is held by the founding family who still run it.
Khing:
Got you. Very interesting.
Great, and so, can you tell us a bit more about the business? What does the company do?
Yusuf Samad:
Right. I said it's a global leader. It produces and sells rice and pasta. And it has... pasta is about 44% of revenues, rice is about 56% of revenues.
These are all branded products that it has, like Rice, it bought recently last year. So they make and produce pasta, and what they produce is not just staple stuff, but stuff that is easy to prepare, so ready to eat stuff, microwavable stuff, they do that.
They sell mainly, interestingly, only 6% of the sales are into Spain. So the bulk of the sales is into Europe and America.
Khing:
Got you. So why do you think the market is mispricing this stock? And what are the catalysts, if any, for the trade to work out?
Yusuf Samad:
Yes. So this is a steady business. It's kind of dull and boring. So that's another reason to avoid it, because it's like 4% growth over the last three to four years. But it's got a strong balance sheet, and I said it's founder owned. But the market doesn't like, I think, and therefore the share price is undervalued with respect to other peers, you could say, from Nestle, Dannon, Unilever, other food producing companies. And why is that? It's because over the last three years, they've had a huge cap-ex program of 408 million Euro. Management has done that, but the sales side particularly doesn't like that. They haven't seen the numbers come through in EBITDA growth or in margins. The margin, they tend to focus on margins. And yet, historically, if you look at it, the company has a very good track record of allocating capital. It has very disciplines in its systems and all its businesses, where it measures what's the net return on capital employed, is a key measure. And EBITDA growth, EBITDA number is a key measure, but over longer term periods. So I guess this is a case where management is investing in its own business, spending a lot of money, but the market wants to see short term results. And that's the opportunity for somebody like me, who is not pressured to deliver quarterly performance.
Khing:
Got you. And what gives you confidence? So it sounds like they've invested quite a bit, and the metrics haven't improved yet. Why do you believe those metrics will improve? Presumably return on capital, margins, and over what time periods? Are they working hard on that right now?
Yusuf Samad:
Yes, so, the company actually... So I'll give you two aspects of this.
Firstly, the long term track record of this particular manager, has been in place, the founding family, has been in place since 2002, five or so. This goes back to the point of being owned by the family and run by the family.
Their own money is in it, so they are very careful about it. They got out at the right time and invested in rice and pasta. So they have the knowledge, they've got strong capabilities in there to do that.
They're investing in a huge plant in Spain which will produce some of the value added, higher margin products, within this generalized commoditized rice and pasta market, microwavable products, ready to eat products, different sizes. And this investment will come through towards the end of next year. It's being delayed a little bit by COVID. So they are making their capital adjustments. Secondly, I think the market seems to reflect too much on a drop in the EBITDA margins that took place in 2018, and that was mostly in the U.S. where the costs went up due to higher employment levels, some material issues. And that dip took place. But 2017 was a good year, and the company is coming back.
Second piece I would say is that, in fact, in the COVID crisis, the company has [inaudible 00:10:48] phenomenal growth. This stock, the sales and EBITDA, has gone up like 22% in the first half of 2020. And that's because, as you well know, people have been hoarding pasta and rice. They've been cooking it at home, they've been doing this... So actually the company has been doing far better this year, and that takes care of this year. By next year, the new plant comes on stream, and then that will start to deliver the better margins.
Khing:
Understood.
Yusuf Samad:
Can I say one more thing?
Khing:
Sure.
Yusuf Samad:
In the meantime, you are paid to wait. And I do apply this methodology. The stock has a dividend yield that pays quarterly. They'll be paying dividends. The yield is about 4%. Again, because of the alignment, strong alignment with the management, they will continue to pay that dividend. They have announced that they are going to be selling that business, so that will sell for something like 10 times EBITDA, about 340 million Euro. Half of those proceeds will go towards reduction of debt, and half will be paid out to the shareholders. So there's an extra dividend potential. There's a reduction of debt potential in this company.
Khing:
Understood. And you mentioned earlier about how Ebro trades at a discount to some of its peers.
Yusuf Samad:
Yes.
Khing:
What sort of multiples are we talking about here, and what's the discount?
Yusuf Samad:
Right. So I've been looking, so I look at it on an EB to EBITDA basis. I found that this company trades at a 9.5 times EB-EBITDA multiple. But if you look at the peer group, going from Dannon, which is the poorest performer, Unilever, and then Nestle, they are all going up to... Nestle is 17.5 times, and Unilever is 14 times. Now this company obviously doesn't have the same sort of diversity of product growth. It's a steady grower, but a 9.5 multiple I consider to be too low. It's should be at least 11.5 to 12 times. So that's the multiple piece of it. Plus the market has sort of underrated its EBITDA numbers because they are focused on the 2018 performance, and yet in 2019 the margins are already up, and as I said, 2020 is going to be a substantial growth in the EBITDA numbers.
So with an EBITDA something like 406 million, I'm estimating for 2020, the consensus was a lot lower. When I looked, more like 380. And at that sort of multiple, the company would give [inaudible 00:14:02] share price which is not where we are today, close to 36,40 Euros.
Khing:
Great, excellent. Yusuf, was a great summary and sounds like a very interesting trade. We appreciate it. I guess a final question I always like to ask is, what... And it's not specific to this idea. What's most important investment lesson that you've learned that you'd like to share with our listeners?
Yusuf Samad:
So, lots of lessons I've learned, because I've paid for them. But in actual terms, since I've been investing. And I think the key one is that you must... Market price is not an indicator of value. So I've made those mistakes many times, thinking of price... Not paying for Google, thinking this is too expensive. And so I think one has to understand a business very well, and remember the intrinsic value, and price it to difference. So this lesson that even I learned at CFA and everywhere else, we've hammered on us. Markets are inefficient, and [inaudible 00:15:11], they often gives you opportunities, because investors apply a broad based approach.
Khing:
Great. No, that's great. That's what we like to see, obviously, because that's what drives markets, and it's what drives also our platform. Yusuf, thanks very much again. Really great to hear about your idea. Thank you for your contributions to the platform. Anyone who wants to learn more about this trade can read the full thesis. Yusuf has done a lot of work, actually, on our platform, AlphaSwap.io, where you'll find his idea and many other ideas. Thank you very much, and we'll look forward to the next episode. Thanks, Yusuf.
Yusuf Samad:
Thank you very much. Enjoyed that, thank you.
