Description

G Willi Food is a NASDAQ listed Israeli food company that for years was a sleepy cash generating marketer and distributor of a combo of owned and distributed brands (about 50% from owned and 50% from distributed brands). WILC began a new strategy in 2017 to create its own brands and the company is now a 90%+ owned brand food company. After years of slow revenue growth (in 2018 you see the gross and EBITDA margin kick up from the owned brands on flat revenue), the new strategy began to kick in and in 2019 WILC grew revenues 27% and EBITDA 32% in a market growing low single digits. The valuation has not caught up to the strategy change (and success in creating a branded food company) and the growth. You can still buy it for 6x 2020 EBITDA-CX (7ish trailing). If the growth continues, you will get both a material higher level of earnings and a materially higher multiple. WILC has a defensive cash rich balance sheet with a book value of about $10/share. Undervalued owned real estate adds a couple dollars to book.  You have real upside with a great balance sheet and no virus risk. 

As of today, 90% of the company’s revenues are their own brands so the part of them that is a distributor is now more of an afterthought.  The company has never really marketed itself to the equity markets but with the change in strategy and growth it is now intent on communicating that they are a branded food company with well in excess of market growth, a great balance sheet and cheap valuation. The stock was just cross-listed in Israel (WILC IT) and now will likely gain admission to the TA-125 as it has a larger market cap than the smallest companies in that index. 

WILC outsources manufacturing much like many food companies (i.e. Annie’s in the US, which uses a co-packer to produce). They are a branding, marketing and distribution company. Gross margins and overall margins will continue to lift, as the growth is from all their own brands and the business continues to gain scale. The stock trades for around 7.1x trailing EBITDA and 7.3 trailing EBITDA-Capex. This is far below even where low growth distributors trade, despite being a small high growth branded food company.

Ignoring a Covid-boosted 1q ebitda growth of 47%, the business is on track to still grow revenues 15% (grew revenues 17% in April against an overall market that grew 1%) top line and 20-25% bottom line going forward. The growth is built on continued brand introductions, extensions and market share gains. All-in, the business likely trades around 6x 2020 EBITDA. Israeli tax rates are similar to the US, and Israel has a better fiscal situation and they are likely to stay there. If valued the way the market would value a high growth food company in the US, 20x EBITDA would be appropriate. Strauss, which is the largest Israeli food company, trades around 15x EBITDA and only grows at low single digit percent. 

The market cap of WILC is approximately $200mm with $70mm in cash and investments. WILC took some markdowns on their investment grade bonds at 1q end so cash and investments should come back quickly to mid $70's. There is also $5mm of strategic loans for total cash and investments of around $80mm leading to a $125mm EV. With the renewed growth, there will be less free cash flow in the near term as inventory and trade receivables will grow quicker than payables. When revenue growth slows, EBITDA will be very good approximation of free cash flow since capex is in the $0.5mm range.

With a $125mm EV and $16.9mm in LTM EBITDA, you get to around 7.4x. I think EBITDA this year will come in at $18mm. Put a 12x on $18mm EBITDA and $80mm in year end cash and investments and you get to a stock price of $22.5 or around 50% more than today’s level.

The company continues to grow new brands and innovate.  They are launching a new Euro Cheese line, which is an extension of their Euro Spread which started in late 2018. The business could head towards $20mm+ in EBITDA and get a bigger multiple with a stock price of $30+ (15x ebitda). You are not paying much for a good balance sheet and exceptional growth for a food business (from a small company with 1.3% share of the Israeli food market) in a stock market where I can’t find stable (read no virus damage) companies with low growth and a good balance sheet at anything less than 15x EBITDA. .   

The chairman and control shareholder, Zwi Williger, consistently buys shares in the open market (he bought 150k shares in January) and I imagine at one point will either move to reacquire complete control and take the business private, or sell to the business to a larger food company. Fortunately, Israeli rules on control shareholders are tougher than the US with nearly every move requiring minority approval.

Background

WILC outsources production of its food and markets and distributes it.  They are asset light in manufacturing but maintain a warehouse and distribution capability. Israel is the size of New Jersey with most of the population in a narrow central section so distribution is very efficient. The company’s core business for decades was it’s own brand of Willi Food canned products and several other created brands along with distribution for other company's brands.  Now they own the brands which makes the company’s earnings stream incredibly reliable. The business has been public in the US for nearly 20 years and has always had an overcapitalized balance sheet and is controlled by Zwi and Joe Williger. The business generated reasonable EBITDA and grew revenues fairly methodically.  You can get a full history of WILC with a couple of past VIC write-ups so I’ll be quick.

Zwi sold out majority control of his family business to a group that turned out be criminals at about $17/share in 2014.  The buyers were ineffective in managing the company and loaned $3mm of company cash to a sketchy hotel in Austria backed by an Azerbaijani and Austrian bank where there were apparently some related party issues. The details are not clear, but WILC has since recovered most of the loan. The buyers of the company were arrested in 2016 for fraud related to this loan at which point Zwi began to acquire shares in the holding company to regain control and did so by 2017. He then threw anyone and everyone associated with the prior owners out. It is worth emphasizing that Zwi had no connection to the company when this loan/fraud occurred.   

All in, Zwi and his brother control 75% of the business. He has rededicated himself to growing the business and either selling it for everyone or acquiring the minority interest to take it private.  

Once he re-established control he stabilized the business and developed a strategy to grow.  As an example, the company exited a deal to distribute for the Dutch company Arla which had a dairy spread called Lurpack.     Zwi developed his own brand called Euro Spread and it has been a homerun. He is now launching Euro Cheese as well.  You can see the effect with 2018 revenues flat as the business was growing new brands but also experiencing the effect of the loss of Arla.  You see a 2018 gross and EBITDA margins jump with great bottom line growth.  2019 you see great revenue growth that was masked in 2018 from Arla exit and the further margin kick.  1q2020 was clearly juiced by excess supermarket stock up but the rev growth was great before March and in April as well. 

Zwi is a smart and disciplined manager. He follows every dollar of the company and is beyond disciplined when it comes to acquisitions. The company will consistently look at deals (they often get announced in the exploratory stage in Israel) and has passed on every deal for nearly a decade.  The chance of him doing something stupid is about as low as it gets since it is nearly all his money and his namesake business.

In summary, I think this is a decent growing business at a more than decent price. There is a chance to double your money (despite a drag $5-6/share of cash) at only 15x a forward EBITDA-CX number for a fast growing now branded food company while having the safety of a debt free balance sheet. To make 50% you only need about 12x this year’s E-CX number.

Catalyst

Marketing and Israeli cross listing

Index inclusion

General market awareness of growth and the branded nature of the businses