Seeking Alpha

Solving The Counterfeit Problem - Guala Closures: Quality Growth At A Reasonable Valuation

by: Alex Nieberding
Summary

Guala is the world's leading supplier of safety and luxury closures for alcoholic beverages such as whiskey, gin, rum and vodka.

The counterfeiting of spirits is a massive problem for brand owners. Guala's products offer a cost-effective and value-added solution that is driving above-market growth.

In the wine market, Guala's sales are driven by the ongoing switch from cork to quality screwtop closures, of which Guala is the global #1 producer.

Due to its recent 'backdoor' listing on the Milan stock exchange via SPAC, Guala has thus far been overlooked by international mutual funds.

At just 7.5x EBITDA, 11x EBIT and 8% free cash flow yield to equity, its valuation is highly compelling.

Alcoholic spirits are the fourth most counterfeited product in the world after audio-video, fashion clothing, and pharmaceuticals. According to trade association INDICAM, roughly 12% of all spirits globally are counterfeit. The cost of counterfeit alcohol is measured not only in lost sales revenue but in lost customers -- those unfortunate consumers who accidentally ingest a fake product, have a terrible experience, and as a result never return to the brand again. But unlike the other frequently counterfeited categories, there is a dependable and cost-effective way for beverage brands to combat fakes. This is the massive problem that Guala Closures solves.

Business Overview

Founded in 1954, Guala Closures S.p.A. is the global leader in non-refillable closures which are essential in preventing adulteration and counterfeiting. Guala is the leading global producer of specialty aluminum closures for spirits and wine; it also makes closures for non-alcoholic drinks (aluminum caps for glass-bottled water), olive oil, vinegar and pharma products. The core products are safety closures (42% of sales), alu roll-on closures (30%), wine screwcaps (19% of sales), with the rest being in pharma and other closures.

Closures

(Source: Company)

Guala is headquartered in northern Italy. The company operates on 5 continents with 27 production sites and has a commercial presence in over 100 countries. It employs c. 5,000 people.

Since taking the helm at the company in 1998, CEO Marco Giovannini and his team have transformed a commodity into a value-added product, growing the turnover from c. €70 million to c. €600 million with EBITDA margins at 20%. Guala went public on Aug 6, 2018 through a SPAC merger via an Italian holding company. This SPAC itself IPO'd at €10 per share in December 2017. It later acquired Guala for Euro 505 million equity valuation in April 2018. Guala had been private equity-owned since 2008 by aPriori (former DLJ PE later CSFB PE). The company has been on a buy & build path completing more than a dozen add-ons over the last decade.

Financials

FY2014 FY2015 FY2016 FY2017 FY2018 FY2019e FY2020e
Sales 487.8 520.5 500.3 534.8 543.1 578.7 623.8
% growth -1.3% 6.7% -3.9% 6.9% 1.5% 6.6% 7.8%
EBITDA adj. 94.9 105.7 100.5 110.6 104.5 117.7 127.1
% of sales 19.4% 20.3% 20.1% 20.7% 19.2% 20.3% 20.4%
Capex 33.8 22.7 31.3 28.9 36.0 36.5 36.5
% of sales 6.9% 4.4% 6.3% 5.4% 6.6% 6.3% 5.9%
thereof maintenance capex 13.5 9.1 12.0 11.0 15.0 14.6 14.6
% of sales 2.8% 1.7% 2.4% 2.1% 2.8% 2.5% 2.3%

Source: Standard & Poor's Capital IQ

Market

Guala is a global player with 90% of revenue outside of Italy. It has leading global market positions in all of its segments and is the technological innovator in the sector with many patents. From an end market perspective, 63% of sales go into the spirits market, 19% into wine, 14% into non-alcoholic beverages, 2% vaccine vials and 2% oil & vinegar. GCL benefits from a variety of growth drivers. Premiumisation is an important trend not only in spirits but also bottled water.

market shares Source: Guala Closures

Spirits are the 4th-most counterfeited product in the world and safety closures are a key tool in fighting this. Safety closures grew at a CAGR of 8.5% from 2011-2016. Asia, Africa and LATAM are expected to show mid-high single digit growth over the next years as well and GCL is especially well positions in those markets. In addition, Guala has partnered with NXP semiconductors to introduce the world's first near-field communication enabled closure, allowing consumers to interact directly with brandowners via their smartphones.

Another driver is the substitution of wine corks with screwcaps. There are clear benefits as the rejection rate of cork vs screwcap wine is 4.7% vs 1.6%. High penetration markets for screwcaps are Australia (70%) and Germany (44%) while China (8%) and the US (18.5%) have significant growth potential. GCL invented an oxygen filter in the screwtops to protect the wine's longevity.

screwcap Source: Guala Closures

Guala is well aligned for these growth drivers with a global production footprint in LATAM, ASIA and South Africa. Guala delivers to Constellation Brands, LVMH, Pernod Ricard, Campari, Bacardi as well as many regional champions.

Competition is broad with players like Amcor, Orora, Inesa, and Alcopack. GCL holds a 60% global market share for safety closures and is 6x larger than the next competitor. In wine screwcaps, Guala holds 30% market share and is also the global #1.

Valuation

Packaging peers with similar margins and growth profiles are Amcor, Orora and Berry Global. They trade between 8-11x 2019e EBITDA and 13-15x 2019e EBIT giving Guala a peer-based valuation of €7 to €12 euro per share, an upside of +10% to +88%.

Thinking more broadly about peers, Guala shares many qualitative factors with the flavors & fragrances ("F&F") sector:

  • both sell into robust end-markets with limited cyclicality (there is in fact significant customer overlap with the beverage brands)
  • secular growth drivers lead to mid to high single digit organic growth
  • sustainable EBITDA margins in excess of 20% plus high free cash flow
  • the actual product cost is minor compared to the total end cost, however the product contributes significantly to the overall customer experience
  • high switching cost in the sense that once the product has been introduced, it is difficult to switch suppliers without a noticeable difference to the end consumer

The comparisons to F&F end with valuation. Symrise, one of the four global F&F leaders, trades at 19x EBITDA, 27x EBIT and a free cash flow yield of 2.4%. Guala, by comparison, trades at well under half these metrics: 7.5x EBITDA, 11x EBIT, and 8% FCF yield. (All 2019E figures; source: Capital IQ)

Guala is capitalized like an LBO with 4x leverage on a valuation of 7-8x EBITDA. We calculate that the de-leveraging at a stable valuation of 8x EBITDA would make 2x money over a 3.5 year horizon. There are various upsides to our de-leveraging case like optimization of tax rate, margin improvement, interest expense reduction (current rating B1/B+), and reduction of working capital. Finally, we believe that Guala is a prime strategic takeover target due to growth prospects, client relationships, production footprint, technological knowhow and low multiple at 11x EBIT (immediately accretive for most acquirers).

Investment Thesis

The business is a global leader in robust end-markets with c. 8% organic growth. The unusual way Guala went public created a unique buying opportunity. The conservatism of the management team (which holds a 24% stake) regarding leverage resulted in agreeing to a SPAC exit with a HY bond refinancing rather than a traditional highly levered LBO. However, the complexity of the SPAC acquisition did no favors for the liquidity of the shares, and the 2018 financial statements are complicated due to substantial pro forma adjustments. The release of "clean" financials - with no pro forma adjustments - will be helpful for new investors.

The core thesis is the strong cash flows leading to de-leveraging and equity value creation. A potential multiple re-rating is also possible. Guala could also be an attractive strategic target or a private equity P2P.

Conclusion

The timing for an entry in Guala now is excellent as current trading momentum is strong. Q1'19 sales & EBITDA growth was 8% & 9%, respectively.

Guala shares retreated from the IPO price by c. 40% in 2H'18 following two flat quarterly prints (largely FX-driven). This created a buying opportunity with a high margin of safety.

GCL shares remain c. 80% held by Italian investors. Part of the investment thesis is the inevitable discovery by international investors of this undervalued market leader. Like the aging of a fine wine, time is on the side of this business.

Further reading

Guala is highly characteristic of my private equity approach to public market investing. This strategy and other investment ideas are discussed in my recent Seeking Alpha PRO+ interview:

PRO+ Exclusive - SA Interview: Investing From A Private Equity Perspective With Alex Nieberding

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The fund I advise is long Guala Closures S.p.A.