|Shares Out. (in M):||133||P/E||11.7||10.6|
|Market Cap (in $M):||2,190||P/FCF||10.3||8.7|
|Net Debt (in $M):||58||EBIT||266||286|
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Logista is a typical case of a good deep-value investment, a company with high revenue visibility, no debt, captive customers and honest and conservative management that efficiently deals with shareholders.
COVID's situation has meant that there is an opportunity to acquire a company with a highly resilient business model, superior profitability, robust economic cash flow profile (FCF C. €200mn p.a., 6-7% FCFy), attractive shareholder returns (7-8% DY p.a. 2020-23e), c. 80% EBITDA-cash conversion and at fair implied valuation multiples: 13.3x adjusted P/E FY20e, 8.2x EV / EBITDA (vs. 11.0x EV / EBITDA in defensive distribution peers) with c. 53% upside potential to our €25.2/share price.
(a) Contrary to sentiment, market is not sexy but neither a melting ice: Global cigarette volumes have registered a - 1.2% CAGR 09 - 18 (from 295 billion packs to 265 billion packs) with the number of smokers worldwide falling by 29 million between 2000 and 2015, while the world population increased 20% in the same period. Nevertheless, the global tobacco market has grown at a 3.6% CAGR 09 -18, thanks in pa rt to sustained price increases and the introduction of the so - called next -generation products (e - cigarettes, heat - not - burn) which have registered very strong growth (41% CAGR 09 -18), specifically in the most mature markets. Those new products are expected to lead growth, as traditional consumers turn to them to quit smoking, and they become the preferred option for younger generations. Although regulation will continue to play a major role in the market, we believe Logista is well- positioned to benefit from the opportunity that this new emerging product category offers, adding long-term growth for the company.
(b) Strong fundamental model with no debt and high entry barriers: We highlight several differential aspects of Logista’s business model: i) high distributor switching costs for tobacco manufacturers: the regulatory requirements of neutrality and universality limit competition between distributors; ii) Logista provides high - value added services to tobacco manufacturers through its technology systems; iii) Logista acts as an outsourced tax collector for governments, with these ‘tax management’ duties being the origin of its outstanding net cash position and negative working capital. Despite almost all of Logista’s cash is considered restricted, and the company has an additional financial business of managing the cash position; iv) Logista has a contract with Imperial for a cash line with a maximum drawdown limit of €2.6bn and at an attractive cost equivalent to the ECB reference rate + 0.75%until 2024e; and v) increasing efficiency through a vertical business model with a culture of continuous improvement to drive further cost reductions and fuel EBIT growth.
All these elements combined give the Company a clear competitive advantage that is reflected in an average ROCE of c. 20% which is sustainable over time.
(c) Sound and stable cash generator machine with an attractive FCFE and TSR: Our model yields an Our DCF model of the Logista group yields an Equity Value of €3.3bn or €25.20/share, which implies 10.5x EV/EBITDA, 11.9x EV/ Rec. EBIT, and a 6.4% FCFE yield FY20e , multiples which we believe to be reasonable and which are broadly aligned with Logista’s historical references and with average M&A transactions, listed comps and other market references.
Consequently, at current price and based on its highly resilient business model, superior profitability, robust economic cash flow profile and attractive shareholder returns.
• Logista is a leading provider of logistics and distribution services for tobacco manufactures in Spain, France and Italy. The company serves c. 300,000 delivery points as well as 45,000 PoS terminals installed. The Company distributes tobacco, convenience products, pharmaceutical, telephony, lottery, magazines, collectibles and books.
• Although tobacco is its main source of income, the Company has been migrating towards other related activities in the proximity business, taking advantage of the valuable network it has with retailers. This diversification strategy started in Spain and right now is also implemented in France and Italy.
• The Company has its own proprietary order-management software (PoS terminals) from which it manages supply-demand from consumers and suppliers. Additionally, it has a proprietary distribution network in Europe with c. 37 central warehouses and 610 proximity warehouses.
• The Company is vertically integrated in a mature but high-margins business model, with zero debt and a pay-out of between 90-95% of Net Income.
Exhibit 1: Competitive Position & Breakdown by Vertical (Source: Logista Company Presentation)
Exhibit 2: Competitive Position & Breakdown by Client / Sector (Source: Logista Company Presentation)
Company Key Competitive Advantages
The Company has clear competitive advantages due to the regulation of the sector itself, its large market share and its financial discipline.
High Switching Costs
(a) Regulation: Relations between tobacconists, wholesalers and manufacturers are governed by the principle of neutrality, which in Spain, France and Italy is under the supervision of the respective tobacco market regulators. Under this principle of neutrality, wholesalers must deliver orders to tobacconists regularly and with a guarantee of supply coverage, under similar conditions of service and delivery for all tobacconist shops, so as to guarantee neutrality of supply.
In regulated markets, manufacturers must ensure that their tobacco products reach the entire geographical scope of the monopoly, which is why it is usually a requirement in distribution contracts with wholesalers that they cover the entire territory concerned.
(b) Long-term contracts: Since the Company's IPO in 2014, all contracts have been renewed and the Company enjoys long-term contracts with high visibility from customers.
In total, Logista has more than 50 contracts with tobacco manufacturers in Spain, over 30 contracts with tobacco manufacturers in France and more than 35 contracts in Italy. The contracts between Logista subsidiaries with each tobacco manufacturer are independent for each country, so the renewal periods per manufacturer and country are not the same. The contracts have an initial term of between one and 3-4 years and provide for an automatic extension of this term from one to two years, unless either party terminates the contract.
Despite the manufacturer’s freedom of choice of distributors, Logista has managed to maintain and renew all contracts at the end of their term or shortly after the expiration of that term. This has been the case historically, and also since the 2014 IPO.
(c) Track-record: Logista’ s levels of service and performance are best-in- class, ensuring manufacturer’s requirements (e.g. stocking guarantee, minimum lead times) are met to the highest standards.
(d) One-stop-shop model for retailers and a highly attractive network for suppliers: the company’s service offering covers the full value chain, thus providing a “one-stop shop” solution for its clients, representing a key attraction for manufacturers. For suppliers, Logista offers guaranteed access to all retailers in core markets (Spain, France, Italy), ensuring that all manufacturer's products are delivered upon request.
(e) Market Share: Being the leader in the market offering real-time supply-demand tracking through PoS terminals increases the value of information given to clients about market trends and maintains client’s captive.
Logista has a market share of around 99% in the region comprising Spain, Portugal, Italy and France, in terms of volume of tobacco distributed (representing around 178,340 million cigarettes and equivalent units in 2019).
Financially Sound Model
(a) Net Cash and Negative Working Capital (c. 3Bn): Logista acts as an outsourced tax collector for governments, with these ‘tax management’ duties being the origin of its outstanding net cash position and negative working capital. Despite almost all of Logista’ s cash is considered restricted, and the company has an additional financial business of managing the cash position. Additionally, Logista has contract with Imperial for a cash line with a maximum drawdown limit of €2.6bn and at an attractive cost equivalent to the ECB reference rate + 0.75% until 2024e.
Exhibit 3: Working Capital Evolution (Company Data)
Exhibit 4: Cash & Capital Employed
(b) Hedged Margins due to business model nature: Logista obtains an equal gross margin per SKU reference in the distribution of tobacco products to all manufacturers for the same volume distributed per reference. The gross tobacco distribution margins vary according to volume (higher volumes mean a lower gross margin per reference for Logista). This SKU gross margin includes various services such as procurement, warehousing and stock management, order preparation, delivery, invoicing and copper, and customer service and after- sales, among others.
Logista normally updates its gross margin table on an annual basis (common to all manufacturers), updating its fees based on the CPI, its fuel costs, the market and the complexity of distribution.
Exhibit 5: EBITDA Growth and Margins (Company Data, implied assumptions)
In addition to its gross margin for the distribution of tobacco products, Logista's revenues also increase with the value- added services provided, which have an independent tariff, such as for example: international transport, more regular sales information, call-centre services for specific actions.
(c) Cost Cutting / Opex Discipline: Since 2011, the company has implemented several initiatives to reorganise its operations and fine- tune its process optimisation. Logista has achieved €109mn of cost savings on the basis of these measures, and has been able to increase recurrent opex at a CAGR 11- 19 of just +0.5 %, to compensate for the volume declines and thus achieving recurrent EBIT growth in the period (+3% CAGR).
This culture of continuous improvement to drive further cost reductions is an important element of the company’s equity story and partly explains our future financial projections for the group.
The global tobacco market was worth $814bn in 2018 and has grown at a 3.6% CAGR 09-18 despite suffering accelerating volume declines in cigarettes. By regions, the Asia Pacific market is the largest and was worth $361bn or 44% of the total market as of 2018 (39% in 2009) followed by the Western Europe market worth $173bn and the North American region with $138bn. Eastern Europe represents 7.2% of the total market ($59bn), while the Middle East and Africa is worth $42bn. (Euromonitor)
Exhibit 6: Total Tobacco Growth (Euromonitor)
Growth has varied across regions with a clear difference between the more mature Western Europe (flat CAGR 09-18) and North American markets (1.3% CAGR 09-18), on the one hand, and Asia Pacific, the Middle East and Africa and Eastern Europe, which grew at respective CAGRs of 6.3%, 4.5% and 4.3%, on the other.
Exhibit 7: CAGR by Market (Euromonitor)
The Tobacco market is divided into five product segments: cigarettes; cigars and cigarillos (C&C); e-vapour products (which include heat-not-burn varieties); smokeless tobacco; and other smoking tobacco alternatives(RYO, pipe tobacco kreteks, bidis, etc.).
The cigarette category dominates the market, as it has traditionally enjoyed market shares above 90% until 2018, when the faster growth of the rest of categories, mostly e-vapour products and C&C, pushed cigarettes’ share to below 90%. However, as cigarettes still represent almost 90% of the industry, we think it is worthwhile analysing volume trends for the whole of the Tobacco industry based on cigarette sales.
Exhibit 8: Market split by Product (Bloomberg)
In terms of volume, the global cigarette market shrank at a - 1.2% CAGR 09 -18 from 295 billion packs of cigarettes (or 5.9 trillion sticks) consumed in 2009 to 265 billion packs (5.3 trillion) in 2018. This trend seems to be accelerating with a -2% CAGR over the last five years. Volume has only increased in three of the top-ten consumer countries (Turkey, Egypt and Pakistan) in the last five years, with the largest increase in Turkey (5.7% CAGR 13-18), and slight increases in Egypt (1.0%) and Pakistan (0.3%). These countries represented 5% of total cigarette market volume in 2018; thus, they do not lead us to foresee a reversal in the trend.
Exhibit 9: Global Volume Evolution (Bloomberg)
In an effort to tackle declining cigarette consumption volumes, the main players have invested heavily in the research, development and marketing of e-vapour products to diversify their portfolios. As a result, the e- vapour market has grown at rates previously unheard of in the industry, from less than $1bn in 2009 to $15.7bn in 2018. Growth in this market has been anything but uniform across regions; unlike the global market, the fastest growth was in the more mature markets of Western Europe (83% CAGR 09 - 18) and North America (67% CAGR). As of 2018, North America represented 47% of the total market, while Western Europe accounted for 34%, and the rest 19% was divided among Asia Pacific (9%), Eastern Europe (7%), MEA (2%) and other markets (1%). The growth of the e- vapour category has completely offset the $8bn decline in the cigarette market in North America and Western Europe in the last five years.
Although Logista operates a business with declining volumes, the company has been able to grow its tobacco and related business by 1.5% per year, despite the 1.6% p.a. volume decline in the FY14 -19 period. This increase came from higher commissions, higher tobacco - related product sales and more services billed to clients, and cost savings, which helped to maintain EBIT and cash flow growth, to self - finance business diversification (into pharma and transport).
(i) DCF Model
Given the strong earnings resilience and tobacco’s inelasticity to moderate price increases, we believe the DCF model is an appropriate valuation for a stable, high cash generation company.
Our DCF model of the Logista group yields an Equity Value of €3.3bn or €25.20/share, which implies 10.5x EV/EBITDA, 11.9x EV/ Rec. EBIT, and a 6.4% FCFE yield FY20e, multiples which we believe to be reasonable given the strength of Logista’s business, and which are broadly aligned with Logista’s historical references.
(ii) Relative Valuation Model
The tobacco distribution sector is only regulated in five countries in the world (Spain, Italy, France, Hungary and Austria), and Logista has a presence in three of them. Thus, transactions in the logistics sector are not good references for comparison purposes. We believe the implicit multiples that Logista paid for both Etinera (Logista Italy) back in 2003 and those paid for Logista France in 2012 are the real valid references for comparison purposes. However, we believe that recent transactions and the average multiples of listed companies can be used as an additional reference for the accuracy of our valuation.
Thesis Risks and... where might we be wrong?
Regulation risk: Logista operates in markets with a state monopoly for the retail sale of tobacco products and the liberalisation of these products could affect the business. We do not envisage significant risks to Logista or to the tobacco distribution model in southern Europe, which in our opinion offers significant advantages to manufacturers, retailers and authorities alike (tax, healthcare and consumer) over the liberalised market.
We believe that in the current economic context, the southern European states will maintain their monopoly and the tight regulation of the tobacco retail business for tax, customs and health reasons.
Partial or total liberalisation of the market could lead to new competition. However, we do not think that Logista's volumes would be significantly altered because:
•The company currently carries out its distribution activities on optimal margins, which would allow it to compete and defend its market share aggressively.
•Logista already carries out other transport activities, trying to optimise its tobacco transport route
Client Concentration: Logista receives a significant portion of its revenues from its main customers (Imperial Tobacco, Philip Morris International, British American Tobacco and Japan Tobacco), and the possible loss of any of them could negatively affect its business.
Having said that, the company has long- term contractual relationships with all Big 4 tobacco manufacturers and has been able to maintain those relationships for almost 20 years.
Elasticity of demand: The main risk to our thesis is the market abandoning its traditional volume/price elasticity ratio due to an abnormally high tax increase. Because of the addictive properties of nicotine and empirical studies the conclusion is that the demand is quite inelastic, meaning that manufacturers are able to offset drops in volume by higher pricing, this thesis has proven right in the past with volume decreasing but the market rising in absolute €.
However, in a company like Logista, there is always the risk of the price elasticity changing over time due to progressive price hikes and anti-tobacco policies.
Exhibit 10: Price - Volume regression (BPI 2017, Equity Research)
(i) Sustainable 90-95% pay-out
(ii) Faster than expected growth of non-tobacco categories
(iii) Opportunistic M&A acquisitions
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