Thursday, March 23, 2017

Refresco Group intrinsic value Benjamin Graham Valuation

Update 2018: Bought out by private equity for EUR 20 per share in spring of this year.

Refresco is a bottler that used to be called Menken Drinks in the Netherlands. They have bought up companies in Europe and recently in the USA. The company went public in 2015.

In 2012 and 2013 the company made a operating profit, but net loss because of high interest payments on its debt financing. I don't know the details of how this came about. Following 2013, the company did have a net profit per share of 0,50 in 2014 and 2015 which doubled to 1 Euro per share in 2016, this together with an increase in book value per share this explains the sharply increasing Graham Number over the past few years.

SECTOR: [PASS]  Refresco Group is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Refresco Group's sales of €2,107 million, based on 2016 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Refresco Group's current ratio €771m/€588m of 1.3 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL]  For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Refresco Group is €761 million, while the net current assets are €183 million. Refresco Group fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Refresco Group made a net loss in 2012 and 2013 (due to higher interest expenses before the IPO) and fails this test.

Earnings Yield: [FAIL] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Refresco Group's E/P of 6% (using the last 3 years Earnings) fails this test.

Graham Number value: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Refresco Group has a Graham number of (15 x €0,9 EPS x €6,7 Book Value) = €11,9 

Dividend: €0,4/€14,3 = 2,8%

Comments, questions or E-mails welcome:

See: for more in depth, qualitative analysis in Dutch.

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