Shares of Amira Nature Foods have been on the rise following a positive release from the equity research team at Jefferies, who updated their opinion of the company and provided key insight as to the intrinsic value generated from its debt for equity swap. For ANFI, the move is expected to unlock valuable equity immediately as well as to reduce liquidity concerns tied to the Indian sub-company. Shares closed higher on Tuesday to end the day at $1.75 per share, higher by 15% for the day. Since last Thursday when the Jefferies upgrade was published, shares are higher by roughly 30%, from a low of $1.37 to today's close at $1.75.
The Details- Where Separate Is Stronger
Last Thursday, ANFI announced a debt-for-equity swap that legally separates its Indian subsidiary from the public company. The strategic transaction will significantly reduce or even entirely eliminate all tail risk associated with the liquidity concerns tied to the ANFI Indian sub-company. Moreover, in an additional move to strengthen the capital structure, the international business arm of ANFI reported raising EUR25M in debt and is positioning the company for the appointment of new management to oversee specific growth initiatives. Based on the scale and implementation of these changes, analysts at Jefferies put out a report believing that the value of the international business alone should be fairly reflected between a price of $2.00 - $4.00/ share. And, even at that level, the Jefferies analyst believes that number to be a conservative estimation. Moreover, many investors believe that this move is just the beginning of a total makeover of the company designed to unleash underperforming assets that can get utilized to facilitate strategic growth initiatives throughout the remainder of 2019.
Key Insiders Shuffle PositionsThe move also shifts the ownership stake of key insiders. The major restructuring taking place not only serves to unlock significant value over time, but, the CEO's family, and other close insiders, has also swapped its loan to the Indian sub-company for equity as well, leaving the parent company with less than 50% of total ownership. The exchange, more specifically, reduces ownership control from 80% down to 49.8% of the company. This is good news as it limits liabilities while simultaneously strengthening growth and financing opportunities.Already in action, the company is implementing major restructuring initiatives that are set to unlock significant value in the near term.
Previously noted, the CEO of Amira, as well as other family members, has swapped its cash loan to the Indian sub for equity such that the parent company now owns less than 50% of the Indian sub – from 80% down to 49.8%. The strategic transactions also will de-consolidate the Indian sub, in essence, legally separating itself from the public company. Also important to note is that the vast majority of the debt is attached to the Indian entity and the creditors were the source of ANFI's liquidity problem. Now, with the Indian sub separated, the international sub is operating as a standalone entity that is already operating independently and has been successful in raising €25M to forward its own business plan and enhance moves to generate additional cash-flow projects. Those moves will likely be benefited by adding new members to the senior management team. Commenting on the transactions, Karan A. Chanana, Amira's Chairman and Chief Executive Officer, said,
"We are excited to announce this financing and believe it will strongly support Amira's international business." She added "The future of this company is to take advantage of every opportunity and utilize the resources at our disposal. Today, we separated two great companies, but our common goal of building a much larger company with manageable and high objectives remains our priority."A Century Of History Of Amira
Amira Foods has been a provider of specialty packaged rice since 1915, with the company positioning itself as a global provider of packaged rice products with service into more than 40 countries. Amira has active trade and branding agreements into several lucrative rice markets that include Basmati rice, premium and exclusively grown long-grain rice and specialty rice blends that can only be produced in certain regions of the Indian sub-continent. Sales are primarily generated in multiple market chains through a broad and extensive distribution network and take advantage of its company headquarters in Dubai, the United Arab Emirates to facilitate systematic trade. Amira has additional offices located in India, Germany, the United Kingdom, and inside the United States.
Business Is Growing, Strategic Moves Will Expedite Growth
Amira Foods is no startup. The international business is healthy and generated roughly $270 million in sales in 2018. Those numbers are coupled with respectable margins that rested at 14.3% of gross sales. However, the company expects to do better with the expectation to add an additional 100bp to the international margins. Notably, there will some be shrinkage to the margins, which may be adjusted lower to account for the separation of the Indian business, due to less vertical integration and less sourcing from the primary processor. However, even with the expected reductions in the margin and certain efficiencies, analysts are pointing to ANFI being able to maintain separate sales of roughly $200 million, albeit with a lower margin of approximately 650bp. However, even with the expected short-term declines, the assumption of the lesser $200 million in sales coupled with an EBITDA margin of an expected 8.8%, can imply that ANFI will generate a positive EBITDA run of roughly $17 million. And, that is a healthy number to build upon.
Focus On The Restructure
What shareholders should also focus on is that this restructuring will unlock value. In fact, given the restructuring terms presented, ANFI stock should likely reflect the intrinsic value of the international business right off the top at $2.00 - $4.00 per share. On top of that, the market can further value the company at an enterprise value of roughly $315 million (generated from net debt and market cap). Moreover, ANFI has substantial land assets in India that are worth an estimated $75M -125M dollars, and in addition to the land ownership holds inventory on hand that is valued at approximately $161 million. Thus, just the assets on hand, if liquidated today, can account for almost all of the enterprise value given to ANFI, which is an apparent disconnect to the company earning a proper valuation.
And, what is most important at this juncture is for ANFI to justify its core strength and be fairly valued at more credible valuations.What is apparent, though, is that if the Indian sub were to be liquidated today, the assets it holds would almost entirely cover most of ANFI's enterprise value. And, given that the Indian business (35% of $144 million) is assumed to be impaired and has now been legally separated along with its hefty debt of $230 million, the International business should be rightfully valued as a standalone company.
Once completed and separate, analysts believe that an EV/EBITDA multiple in a range between 7-10X is more appropriate to the maturing company, giving notice to the fact that the international business is primarily a distributor, with lower margin risk and will generate higher cash flow. And, when using industry valuation multiples, distribution assets generally trade anywhere between 8-11X in the United States.
Then, after assuming the EV/EBITDA discount combined with a multiple of between 7-10X, it implies that an EV of $110 million to $190 million is a reasonable valuation. In turn, the numbers, once finally vetted, and assuming roughly 25M in net debt (disclosed in a presentation published earlier this week) the company should earn itself an equity value of 84M to $160M or $2-$4/share.
Amira Is Worthy Of A Good Look
The news of the debt-to-equity exchange is good news for ANFI. Analysts at Jefferies pricked their ears up as well, noting that this 105-year-old company that is generating significant revenues is indeed better positioned after this deal to continue on its mission to become a more substantial and leaner company.
Well-balanced, asset rich, and diversified into lucrative sales channel, ANFI may be well suited to take advantage of streamlining their business and to develop new avenues of revenue, and company growth.
With shares trading at $1.57 and a market cap of only $64.48 million as of Thursday, it may be apparent that investors are yet to learn about this asset rich company that can generate significant growth by concentrating on its strengths and limit its flanks from potential weaknesses. The deal they announced on Thursday is doing just that.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.