Tuesday, October 2, 2012

Like wine? Then maybe you'll like Oeneo

I don't know if Europe will survive, or if it'll fail.  One thing remains true, the people who live on the European continent will continue to drink wine just like they have for the past nine thousand years.  As long as people are drinking wine they're going to need barrels for the wine to age in, and stoppers to keep the bottles closed, Oeneo (SBT.France) provides both.

Before I dig into the guts of the company here are a few items about Oeneo that caught my eye, and encouraged me to look deeper:

  • The company sold a slow growing division last year for a €12m gain and reduced outstanding net debt by 80%.
  • The company is showing signs of strong growth, net income increased 50% YoY adjusted for the division sale.  Revenue increased 7.8%, and operating income 10%.
  • EV/EBIT of 5.4x
  • P/B of .96x
  • EV/FCF of 6.8x
  • 10% ROE (adjusted for the Radoux sale)

Oeneo is company that plays a vital role in wine production.  The company has two main divisions, wine stoppers, and wine barrels.  The stoppers account for 60% of sales, and the barrels account for 40% of sales.  I originally stumbled across Oeneo when I was looking for competitors to Corticeira Amorim.  Oeneo is similar to Corticeira Amorim in some ways, but also very different.  Corticeira Amorim focuses on cork, and cork products, one product being cork stoppers.  Corticeira Amorim also manufactures other cork products such as cork flooring and cork insulation.  Oeneo is a material agnostic, supplying the wine industry synthetic stoppers, twist off caps, cork stoppers and wine barrels.

Oeneo was an industry leader tackling the cork taint problem a decade ago by inventing a special wash for cork stoppers.  As the industry has slowly moved away from cork Oeneo has changed as well.  The company has expanded their stopper division into synthetic and technical (screw-on) tops.

Oeneo is headquartered and listed in France, but they don't sell the majority of their products in Frane alone.  About two thirds of the company's sales are in non-French Europe.  The sales breakdown is as follows:

  • 35% France
  • 31% Europe
  • 22% US
  • 12% other


The first thing that stood out to me when I looked at Oeneo's past year's results was that I really liked the management's conservatism.  The company sold off a slow growing division this past year and used the proceeds to pay down debt.  The result is that book value jumped €26m and net debt dropped 80%.  As long as a company without debt can pay their fixed expenses they can last forever.  Oeneo is heading this direction, as debt is paid down their fixed obligations decrease.

Here is a look at the past five years worth of results for Oeneo:


The company's results have been fairly consistent over the past five years, the company's net income has bounced between €10m and €22m over the past five years with it spending 3/5 of the time in the €14-15m range.  The company's operating margin has been increasing over the past five years while the net margin has fallen.

The biggest number that stood out to me when putting together my overview spreadsheet wasn't a margin, or profit, but book value growth.  Oeneo's book value stood at €50.8m in 2008 and grew to €126m in 2012, a 19% compounded annual rate for the past five years.  Book value has grown as a results of asset purchases and debt reduction, but most significantly from debt reduction.  The company has reduced net debt by 90% over the last 10 years.

The company's balance sheet is solid with €18m in cash and only €13m in goodwill.  Debt stands at €30m down from €80m.

Why is it cheap?

For a company as consistent as Oeneo I would expect them to trade at a much higher multiple.  Trading for less than book value is usually a sign that a company is destroying shareholder value instead of growing it.  This is not the case for Oeneo which has grown book value by 19% annually over the past five years.

While ROE has shrunk over the past five years as leverage has come down, both the operating and net margins have remained stable.  Even though the return on equity has dropped Oeneo is still producing the same consistent operating results, and as a result of debt reduction is a much safer company than five years ago.

The question "why is the company cheap?" is the one question I can't answer from Oeneo.  The problem is I'm not really sure the company is cheap.  When I look at a long term chart they're trading at close to a five year high.  The shares are trading with a low EV/EBIT multiple, but they're roughly in line with the overall French market.  If any readers have insight on this point I'd appreciate it.

Can they sustain their current results?

After asking if the company's cheap I want to know if the company's results are sustainable.  The worst investment is buying into a cyclical company at the top of the cyclical when profits are at their highest and the multiple is at its lowest.  A fear of mine is buying a cyclical at the top, fortunately Oeneo doesn't appear to be very cyclical.  Over the past five years the company's results are fairly consistent.  Readers might wonder why I'm only focusing on the last five years and not the last ten or fifteen years.  The reason is the company underwent a substantial change about six years ago.  They went from losing money to making a significant amount of money, which in turn resulted in book value growth.

The switch from losses to gains came from a number of factors including a divesture of a wood plant in Iowa, a new CEO, and a change from cork stoppers to synthetic and technical stoppers.  What encouraged me was that the company didn't hesitate to dump underperforming divisions.  This attitude is visible most recently with the Radoux divesture.

Worth an investment?

I haven't decided whether I should invest in Oeneo or not.  The company's book value growth is impressive along with the how relatively stable earnings.  I'm also encouraged with the Radoux divesture, and how management has firmed up the balance sheet.  The problem is I'm not really sure if Oeneo is cheap at this point, or if there are much better opportunities in France.  I'm still poking around the French small cap space and if nothing better catches my eye I will probably consider an investment in Oeneo.

Talk to Nate about Oeneo

Disclosure: Long Corticeira Amorim, no position in Oeneo

4 comments:

  1. Hi Nate,

    interesting that you bring up Oeneo. Tonnelerie Francois Freres which is one of my main holdings is the company which just bought Radoux from Oeneo.

    Oeneo's past is really horrible, share count for instance increased stteadily due to a series of distressed rights issues.

    From the perspective of TFF, the Radoux purchase was quite nice because the market leader could buy the struggling number 2 and will hopefully reap some synergies. And the price paid was Ok.

    I am not sure what is now left at Oeneo, from what I know they are now only producing cognac barrels.

    The shareholder structure is relatively intresting. The company is controlled by by the family behind Remy Cointreau (Debreuil). It seems to be a kind of "playground" for them.

    Oeneo is often among potential delisting candidates, so there might be a potential catalyst.

    However, in my opinion Tonnelerie is the much more interesting comany. I tis not so cheap but a really steady grower with a very strong competititve position.

    MMI

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  2. I like your point about the stable Southern European market for wine. This will probably never be in a recession...?

    Could it be that the great margins , the high growth and the cheap multiples of the company are ignored because of the downturn in the French economy in general? Could it be that this company needs a catalyst, such as french economy turnaround, before people realize how cheap it is?

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  3. Hello Nate
    I own some SBT shares (bought under 2 €).
    How many shares do you take into account ?
    Here are my numbers :
    50,619,974 shares +
    8,648,190 (from the convertible bond = ORA) +
    1,270,548 (from the BSAR ; how the hell to you translate that share subscription warrants attached to the bonds ?)
    =60,537,712 shares
    see page 19 of the "Reference report" for 2011 issued July 30 for these numbers

    That makes SBT cheap but not dirt-cheap.

    I think they're now mainly betting on "DIAM" closures = cork treated (with supercritical CO2) to avoid cork taint. They recently started a second production plant.
    http://www.youtube.com/watch?v=bIvg9EVorJA

    Their analysis is that cork closures (and not metallic screw on caps and related stuff) will continue to be widely used by winemakers for premium/expensive wines (tradition, etc...).

    And if you sell expensive wine, I think you're willing to pay a little more for a cork if you somehow think your wine will age better.

    Operating margin 20 % on closures, 14 % on barrels.

    In principle I'm a little wary of a company relying on a technological advance for competitive advantage, though.

    Regards

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  4. Thanks for this post!

    ReplyDelete