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  • Folli-Follie Group (FFG), Athens
    Folli-Follie Group (NYSE:FFG) is a retailer headquartered in Greece with three different operating divisions, each with quite dissimilar business characteristics.
    About 25% of FFG revenue comes from their majority ownership of Hellenic Duty Free shops.  As the name suggests, this division sells goods in duty-free shops throughout Greece.  Follie-Follie has an exclusive contract in every airport and port of entry into Greece to sell duty free goods until 2048.  This business is a slow-growth but extremely stable cash cow.  I estimate 50% of this business is derived from non-Greek persons.  50% of FFG revenues come from a jewelry design and retail business under two brand names, Folli-Follie and Links of London.  These brands are high-margin growth engines for FFG boasting double-digit same store sales (even throughout 2009), as well as benefiting from steady new store openings funded by the duty-free cash.  Most of this business, about 60%, comes from Asia with the majority of the remainder coming from Europe ex-Greece.  The final piece of FFG, about 25%, is called Elemec Sport, which has exclusive rights to sell branded sports apparel in Greece and Romania.  This business is 75% Greek, was acquired in 2008, has modest operating income but significant real-estate assets. 
    I established a position at an average cost of €13.50 which represents less than 5x earnings and less than 6x EBITDA.  I think this is less than half of fair value given the stability and growth prospects of this group retail model.  Consider that in 2008, an atrocious year for retail and travel, earnings growth of 6% and 30% earnings growth in 2009.  My research has revealed support for strong double-digit growth for this year and beyond.   
    I have identified three misperceptions (in addition to the complicated structure which, as of last week, has been entirely simplified) in the market that drove this business to a large discount to fair value in 2008 and then snubbed the recovery to more reasonable multiples in 2009.  1) Folli-Follie cannot succeed if retail and travel are suffering, 2) A non-immaterial amount of debt comes due in 2010 (due to bad timing on 2008 Elemec acquisition), 3) This is a Greek retailer and Greece is going bankrupt. 
    Folli-Follie market misperceptions one and two began to evaporate in the second half of 2009, only to be reversed with the ignition of misperception three. 
    Here is why these fears are unfounded: 1) Folli-Follie actually grew earnings in 2008 due to the company’s focus on more affordable jewelry and global regions with the best growth.  The duty-free cash cow did not disappoint either, despite the travel slump due to their monopoly position and ability to sell their core products (tobacco, perfume, liquor and sweets) for the lowest price available[1].  2) Debt indeed was a four-letter word in 2008/09, however FFG group has very stable cash flows and even if the debt markets stop getting better (or get worse) FFG has two monetizable assets (Links of London, through a listing, and the real estate of Elemec group, valued at almost the same amount as the purchase price).  3) The Greek government is bankrupt but the citizens are not (the strong black market economy is actually a large source of the government woes), additionally, less than 40% of sales are actually to the Greek. 
    I believe that the gap to fair value will close after the debt is refinanced[2] and growth trends are proven sustainable. Folli-Follie shares currently trade at €18.00 

    [1] The proposed tax increases in Greece will make the price gap even wider further favoring HDF
    [2] The debt refinancing was recently announced at the AGM and is subject to final approval of the merger plan

    Disclosure: Long
    Tags: FFG
    Jul 29 10:32 AM | Link | Comment!
  • WILC (NASDAQ): Current Price/$5.80; Net Cash per shr/$2.66/LTM; EPS/$0.82; Organic rev growth/15%.
    G. Willi-Food International is Israel's largest food importer and also distributes food in the United States (revenues 80% Israel, 20% U.S.). As is typical in this type of business over the long term, revenues have been very stable but growth has been low. Currently, and for the foreseeable future, WILC’s profile has changed and is growing organically at 15% as a result of entry into dairy and refrigerated salad products in Israel and new demand in the U.S. for their products.
    What else good do you need to know about a food company trading at 3.8x LTM earnings (ex-cash) growing the top line organically at 15%?
    ·         Gross margins are rapidly expanding: The decision to get into dairy products has also been a huge boon to margins. GM 1Q'10 was 29.7% up 510 bps YoY. Management believes that margins are sustainable in the high 20s.
    ·         Earnings power is well in excess of previous years: WILC earned $0.75 last year and is on target to earn $1 in 2010(op inc. up 40% 1Q YoY and same trends remain  in place).
    ·         Private label Mediterranean salads demand in U.S. will be big LT business driver: Since the Strauss (the largest Israeli food company) sold a 50% stake in its Sabra (the refrigerated humus and med salads you see in every store with the red tops) business to Pepsi there has been large growth in this category and all of the large U.S. supermarkets are searching for private label. WILC is one of the top companies that can provide this. Given the opportunity, over the next few years it is actually conceivable to see the business shift to 80/20 in favor of the U.S.
    ·         Geopolitical risk is a positive: While not the most fun thing to talk about (I live here) WILC sells several pieces of the standard army ration boxes to the IDF and when there is war or threat of war their warehouse gets emptied.
    ·         Net cash is understated: In 1Q some cash was opportunistically put into inventory and will come back in 2Q. Real cash/share is $3.25-$3.75.
    ·         Management (already large owners of stock) have recently acquired additional shares in a block purchase above the market price and have quietly made known their standing bid to buy more shares (in blocks) at the same price
    So why does the stock trade here (in order of relevance)?
    ·         This company is small and illiquid and is simply not on anyone's radar (yet): Only 13.5mm shares are outstanding for a MC of less than $100MM with 53% owned by an Israeli publicly traded investment co (WLFD) controlled by management. To wit, the recent press release that management had acquired a block of stock 3.6% above the market in a private transaction was greeted with 40k shares of trading and a stock that was flat on the day (you don't see press releases for small cap stocks you don't know about!).
    ·         WILC is having a hangover from a bad secondary deal done in 1Q: WILC has been thinking about acquiring a small distributor in the U.S. to facilitate the large growth it foresees and a small investment bank convinced them it was in their best interest to raise cash ahead of this. They did a terrible deal allowing the bank to price 3.2mm shares at $6.05 (having closed the previous day at $6.98) putting the stock into flippers hands who did no work on the business. Whatever small amounts they had left has held the stock flat over the last few months (which may sound like a good outcome given the market performance and vol but keep in mind that this was over a period where they announced a blow out quarter).   Looking at the number of shares that have traded, this appears near an end.
    ·         A simple internet search will reveal a couple of lawsuits that the Company has been involved in over the last few years. A conversation with management or deeper work into the issues will reveal that these issues are resolved and have had no adverse affect on the business.
    Odds and ends
    ·         WILC does most of their purchasing in Euros and does essentially all of their sales in Shekels or Dollars. Management believes that margins can stay at their current level at the 1.30 level on the Euro. They don’t have a practice (or desire currently) to hedge the Euro so they make more if the Euro goes down or less if it goes up.
    ·         Their offices and distribution facility in Yavne are held on their books at $6mm (with no debt against it). There is a new train line being built in Israel with a new large stop right across from them. Management has indicated that they have recently been approached by banks to do a sale lease back at a value in excess of $25mm (they obviously are not interested given their cash position).
    ·         Management is not keen to waste the cash (most of it is theirs) if they don’t find the right acquisition they have indicated that they will return the cash.

    Disclosure: Long WILC
    Tags: WILC
    Jul 29 7:49 AM | Link | Comment!
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