Originally published on Oct. 30, 2014
I think the fall in the share price of Fyffes (OTCPK:FYFFF) post the collapse of the Chiquita deal is a buying opportunity. This is a solid, lowly geared company trading at a low multiple; it is also a strategic asset, given its market share.
Before I go into the detail on this, a quick note on my history with Fyffes – we have had a long and profitable relationship! I bought in 2010 at 0.32 EUR a share. I sold quite a bit at 1.11 EUR in May 2014 as the rise in price in the intervening four years meant my portfolio was ridiculously dominated by Fyffes. Some portions of the holding were sold for a 244% gain.
In August and September I sold more as I wasn’t happy with becoming a shareholder in CQB. I was left with a rump holding – about 15% of the size of my FFY position at its maximum. On Monday I bought a lot more Fyffes – taking it up to a 13% portfolio weight. I am keeping my powder dry to buy a little more should it fall to c0.85 EUR per share – probably up to a 15-18% weight.
I still think Fyffes can do well. The price has fallen to around the same level as it was before the deal was announced. The market price is not taking into account the 3.5% of CQB’s value in any alternate deal break fee. I estimate that this is worth around 17.8m EUR – so 0.06 EUR per share. There will have been costs to the failed deal. At a guess say €5m – or 0.02 EUR per share. Still this 0.04 EUR gain is c4% of FFY’s market cap.
I like Fyffes as it has lots of tangible assets. Banana farms, plantations, buildings that sort of thing. This amounts to 133.9m EUR net of intangibles – or 0.37 EUR per share – 40% of the current share price. The next question is, how accurate is that valuation. The answer is it's very difficult to say – much of the plant is valued by the directors. The rest is much easier to value – Bananas / other fruits. Quite a lot is in accounts receivable but looking in the accounts very little is past due and there shouldn’t be much risk – despite their problems, the Tescos of this world aren’t going bust any time soon.
Then it's a matter of looking at cashflow. In 2013 this amounted to EUR 27m. They bought a plantation so free cash flow was negative in 2013. To get an estimate of maintenance capex I will take the 2012 figure – so 6.2m EUR. This means if you buy Fyffes today you receive a FCF yield of 7%. In reality the yield is higher – interims showed 36% YoY growth in EBITDA. If we assume FCF grows about 20% we get a FCF yield of 8.6%. Any takeover could be easily financed with Fyffes own cashflow.
On a multiple basis too Fyffes looks cheap. Ignoring the overpriced dog that is Chiquita – Del Monte (OTC:DMPLF) in the US – a much bigger, but similar business is trading at an estimated PE of 12.7 vs. FFY at 8.6-9 vs. likely 2014 FY figures (excluding any break fee payments). Even the veg related cousin of FFY – Total Produce (OTC:TTPCY) - is trading at a forward PE of about 10.8 based on the estimates I have available to me. In addition Total Produce doesn’t have Fyffes' asset backing. I think FFY should have more of the multiple of a growth stock; given solid EPS growth from EUR 0.02 in 2010 to EUR 0.10 for FY 2014, this isn't too far fetched. If you apply a healthier multiple of (say) 15 then you get a share price of EUR 1.50 – a 50-60% increase on the current price.
In addition I think this is a business I want to be in. Healthy food will outperform over the longer term. The health issues associated with packaged / processed food should be obvious to all and eventually I think people will act in their own best interests and eat more natural foods. I also suspect the rumbling supermarket price war (at least in the UK (c1/3rd of revenue) will help sales of fruit – supermarkets earn some of their highest margins on fruit and veg. It is of course possible they could push harder for lower margins to compensate – but I don’t think they will push any harder than they have in the past. I think FFY should have the multiple of a growth stock – given solid EPS growth from EUR 0.02 in 2010 to EUR 0.10 for FY 2014, this isn’t too far fetched.
Risks to my thesis are bad harvests – all bananas are clones so their is risk of fungi / disease. Bad weather can cause losses – this is a low margin business; disruptions i.e. due to 2010 snow can cause losses. Tropical plantations are always risky – again due to weather.
FFY is owned by a diverse and uninteresting group of firms – not much exciting here.
Hopefully history will repeat and I will triple my money again. In reality I think the more likely option is this gets bought out.
Disclosure: long FYFFF.