Source: Amira Nature Foods Ltd. | ANFI Website
Company Overview - ANFI, Indian Exporter Without the Indian Exposure
Amira Nature Foods Ltd. (ANFI) is a family-owned and operated global provider of packaged Indian specialty rice founded in 1915 headquartered in the UAE. They have 135 full-time employees and their sales cover 40+ countries. A majority of their revenue is derived from basmati rice sales, a specialty premium long-grain rice sourced solely in areas of India, particularly the North with 2-3x premiums to standard rice. They provide their products under the Amira brand and white-label options, customer branded. They are currently undergoing a massive restructuring.
Why Go Long ANFI & Why Go Long Basmati Rice Now
Basmati rice has not been a popular segment to follow and it's for good reason. Historically, 2016-2017 presented the industry with double-digit losses. ANFI did not fare much better. With short-squeezes and allegations of manipulation in 2015 and rice demand volatility in the past few years, it may seem to be an odd time. But, when you research deeper into ANFI, you will notice massive changes that seem likely to unlock the return potential of this vastly discounted company.
Basmati rice exports are reaching record levels this year, and the industry is poised for its best year yet. Management has been radically altered within ANFI, and the 2019 strategy is moving towards a high-margin distribution model enabled by targeting high-value western markets with contracts already being confirmed in the past few months.
Seasonality may make the next few months volatile, and with the SEC presenting a delisting risk if ANFI does not reach >1$ by Jan. 2020, it is a fearful time for ANFI investors. But, after ignoring popular sentiment and analyzing the fundamentals, ANFI is a company poised for far greater stability going forward and with it record-level stock returns once the market understands and re-values the risk. I project this will largely take place in April 2020, based on FYE filings [Indian calendar].
With ANFI not posting financials for the recent FYE and/or audited financial updates, it can be a daunting task to understand their market potential. But, by analyzing the most recent export numbers for the country and their target markets, we can relatively understand the growth/demand prospects for basmati rice, their product. The interesting aspect of ANFI's upcoming year's end-markets is how they are strategically placed. When analyzing the export numbers for the basmati rice segment [HS Code: 10063020], you will notice several factors that should affect the relative value of ANFI.
The first factor is the price/demand for basmati rice. To better understand the price and demand for this non-traditional Indian commodity, we can utilize basmati export numbers from India. To confirm, we have a connection, we can see below that ANFI's stock price has fallen and risen synchronously to the export numbers of basmati rice.
Export numbers already factor in the price/demand considerations for the commodity [after considering Qty output and Rs. Crore numbers]. With room for error, this can provide insight into the revenue potential for ANFI.
We notice globally that basmati rice exports are growing, but ANFI has targeted specific export markets [EMEA & North America]. Breaking down the export numbers to these target markets, we can see that the ANFI price collapse between 2014 and 2017 coincided with the basmati rice exports' average y/y contraction rate of -10% [Rs. Crore].
Looking forward, we see that since then, the demand for basmati rice in EMEA & North America has picked up substantially with India's FY2018-2019 posting Qty y/y growth of 9%, Rs Crore y/y growth of 23%, and US$ y/y growth of 14%. This shows not only quantity growth but pricing growth also as well. India's FY2019-2020 [April, May] export numbers of basmati rice have indicated strong demand growth within ANFI's newly targeted segments:
India's Basmati Rice Export Numbers for EMEA & North America Covering April 19'-May 19'
|Qty in MT||Rs. Crore||US$ Mill|
|+16% y/y growth||+19% y/y growth||+14% y/y growth|
There are risk factors to consider including realizing this growth and avoiding sharp declines in price and export volume related to US-Iranian sanctions, but, for now, the revenue potential for ANFI's newly targeted segments is clear, and the demand, in reality, does exist.
ANFI has historically underperformed due to a global decline in prices/demand for basmati rice in 2016/2017. However, now the company is undergoing massive restructuring. The aim is to focus on international sales with their business line primarily focused on just distribution which enables low-cost high margin results. This is evident through the company's sale of Amira-India/Africa/SE Asia and their subsequent refocus towards EMEA+UK and the USA.
Company Expectations for FYE 2019 Operating Performance [as of June 2019]:
As presented above, this is a complex area to forecast given their structural overhaul, but we start with assuming they can continue the progress made thus far on their $200M revenue guidance [37.5% progress]. This is far below FYE2018's revenue of $414M, but per my valuation checks, the market has already discounted the stock -77% below the $200M revenue guidance. The published progress towards the revenue goal as of July 18, 2019, has been $75M [37.5% of the goal] within 29% of the time until FYE2019. This seems like good progress, but the rest of the year typically shows lower sales due to the seasonality of basmati rice based on several years of export numbers. I am still optimistic that this owner-operator company can make its goal, but even if they end the year at their current revenue levels, based on a peer PE multiple of 17.8x and a 2010-2017 avg NI margin of 4%, their stock should be priced at $1.31. This is astonishing 54% discount.
Now, their new CFO and their new strategy, I believe, warrants an optimistic outlook on their current revenue progress. The market seems to disagree, but time will tell.
Complexity attributable to recent accounting changes forces us to look into historical margins to gain an understanding of post-crisis potential operational profitability levels and the CF statement to better understand the viability of the company at present. A company needs cash to operate, but, for some time, with asset sales and debt, a company can survive with cash outflows. I would never advocate investing in a non-CF-based company, but, at the present valuations and operational progress, there is a great upside once stability returns in April 2020. I will now breakdown some key operational factors to simplify ANFI for the reader.
Margins are key to the development and profitability of the business [and to valuations]. There are a few aspects that I am particularly fond of when analyzing this business. The first is the fact that they are de-consolidating ownership of Amira India. If we consider the updates breaking out Amira-India in the investor presentation as of June 2019, we see that Amira-India will take out with it 91% of the ST-Debt equaling a reduction in BS debt of a massive $188.8M leaving only $18M in ST-Debt [very manageable]. This should translate into a large reduction of -$25M to Amira's presented interest expenses and push towards profitability by 2020.
Due to the complexity of ANFI's financial situation with a massive corporate overhaul, we must understand from a general operational perspective. In my analysis, during this period of operational turmoil, excessive non-traditional costs were realized stemming mainly from "other expenses" [see 6K | March 2019].
Additionally, but unconfirmable, ANFI should benefit from the changes regarding inventory costs. According to the ICRA, an Indian credit rating agency, the majority of operating costs for a rice company are concentrated in the cost of raw materials; one of the two major costs of raw materials are related to the cost incurred when holding inventory for long periods when aging the rice. When looking at the changes being made on ANFI's operations side, we see that AMIRA-India, the current subsidiary being unconsolidated based on ANFI selling their ownership, is taking 91% of the inventory and its subsequent management costs. This should translate into a reasonably valuable decrease in operating costs, thereby improving margins and earnings while providing a lift to valuation prices. Overall, the new business model and the connecting deconsolidation of Amira-India should improve the operating capability and results of ANFI going forward.
In March '19, ANFI raised LT debt of EUR25M under ANFI's European subsidiary with the proceeds going to financing its international business lines. This should establish broader sales enabling greater progress to ANFI's revenue guidance of $200M for FYE2019.
Noting part of the left-over debt after deconsolidation of the ANFI-India subsidiary is denominated in rupees, this leaves ANFI with a stronger BS than before, per its foreigner-currency denominated revenues.
In the end, this would leave Amira with a manageable final debt amounting to 52.4M [1/4 of FYE18's Total Debt]. This number does include debt most recently raised by their European subsidiary.
Regarding restrictions to maintain safe operations, there are covenants against issuing dividends outside of profit and debt repayment. This is good for reinvestment and for strengthening the current financial standing of the company. This dislocates any self-interest by management to take home undue pay.
Overall, the balance sheet seems manageable going forward and a decrease in debt levels should increase the probability of continued stability.
Regarding ANFI's new strategy, it breaks down into 5 core pillars to which I will elaborate on the first 3 pillars.
1. Focus on International Expansion | Restructuring | Deconsolidation
2. Westernize Leadership Team | Corporate, Legal and Accounting Functions
3. Improve Capital Structure | Attract New Financing Sources
4. Focus on Third-Party Branded Products
5. Opportunistic Acquisitions
Regarding pillar 1, the new strategy for expansion moves away from traditional low-income based purchasers and into more premium markets [sale of Amira-India and its subsidiaries covering Africa and SE Asia]. The new markets focused on are the USA, Germany, UAE, and the UK. Regarding pillar 2, we have seen the hiring of several key individuals and US-based advisors.
The key individual list is as follows:
One large factor to note is that the previous CFO has been replaced and publication of financials should certainly from now on be timely and be free of error. This should minimize any future claims of manipulation and decrease investment risk.
The advisor list is as follows:
Regarding pillar 3, we have already seen ANFI raise LT debt of EUR25M under ANFI's European subsidiary with the proceeds going to financing its international business lines. This was done in March '19, and we can expect the BS to handle more debt which can enable greater and more consistent sales moving forward.
A major catalyst you can expect between now and FYE2019 in April 2020 [Indian Fiscal Calendar] that I would like to point out is the trend of announcing major contracts. The last sales update we saw was on July 18, 2019; however, any subsequent updates act as a catalyst pushing the price towards the key $1.00 mark required by the SEC this year. We saw this through two announcements and their results:
+8% increase for $9M in sales announced (EMEA)
+9.4% for $6M in sales announced (EMEA)
There are many unknowns to be certain regarding valuation, but, for your understanding of the discount existing and the potential, we can take some conservative assumptions and present an estimation:
After calculating several potential price points, the most basic is the company's estimation of a peer group multiple at 17.8x with my conservative twist on EPS discounted from a NI of $6M [co. guidance] to my $4M. This brings us to a FYE19 price of $1.75. This is a massive +192% upside. Now, if we assume a 50% market discount on the peer group PE Multiple, reducing it to 8.9x, we still get a +46% upside to a price point of $0.87. Another hypothetical variant is modeling under a relatively stable period, like 2016. If we do this, we get a price of $1 which is +67% upside, and in my view, the most realistic but still conservative valuation. Regardless, it's clear that we can expect sizeable returns, contingent on ANFI remaining listed.
RYN's current one-year price target is $1.
Other Risks are outlined in the FYE financials.
In conclusion, we see here a company that is undergoing major changes. These include new management, new strategy, new distribution channels, and a new capital structure. Some will be cautious over the future of a basmati rice producer riddled with historical turmoil, but for the research-savvy investor, this seems to be a solid opportunity to get in at ground-level valuations.
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Disclosure: I am/we are long ANFI. 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.