|Shares Out. (in M):||74||P/E||19x||14x|
|Market Cap (in $M):||440||P/FCF||19x||14x|
|Net Debt (in $M):||-7||EBIT||33||39|
Sign up for free guest access to view investment idea with a 45 days delay.
Historic financial summary below:
I have 2017 EV/after-tax FCF at 14x as follows: £5.94 share price, 74m shares, £440 MC, £22m net cash, £418 EV. 2017 E FCF of £30m is £55m of EBITDA, less £16m maintenance capex, £7m tax, and £2m minority interest. If the scope of their business were to remain status quo, I estimate a 35% share price increase over the next few years based on 15x 2018E FCF of £33m and cash build. However, it’s more likely that Hilton’s scope continues to expand. I will outline how Hilton’s earnings power could grow significantly over the next few years.
How the sausage is made
Hilton serves the market leader in five of the top ten countries in the world, as measured by grocery spend per capita. In each of these geographies, it is the retailer’s largest supplier in the category. To my knowledge, Hilton has never lost market share with a customer. The following table of historical volume by customer illustrates their impressive track record:
Volume per Customer (k tonnes)
Customer (country) 2004 2015
Tesco (UK) 33 77
Ahold (NL) 28 68
ICA (SE) 3 40
Tesco (IE) 5 18
Coop (DK) 10 (2011) 13
Woolworths (AU) 25 (2013) 40
Ocado (UK) new (2015)
Sonae (PT) new (2016)
To illustrate the difference in thinking, here are some statements from Hilton and competitors on strategy:
The differences in plain speak vs. buzzwords and customer focus vs. own take are subtle, yet meaningful.
By partnering with a single customer in a geography, Hilton creates user value beyond the traditional model. On the cost side, Hilton co-locates at the retailer’s distribution center, reducing transport cost. As they are the majority supplier for each single customer, Hilton achieves significantly higher throughput volumes per production line, reducing labor cost. In total, I estimate that Hilton can reduce its customer’s cost by 10%, which is compelling in the grocery world.
On the revenue side, they increase contribution per square foot for customers. By integrating their systems with the retailer’s point-of-sale data, Hilton can change up specialty product combinations (e.g. summer BBQ combo packs) on the fly, increasing yield. In some geographies, Hilton employees effectively manage the category for the retailer.
Industry trends aid Hilton's growth. In existing countries, cost pressures on the traditional supermarket model are shifting volumes to pre-packed products. The butcher is the highest cost (non-manager) in the store and production economies of scale in store level are abysmal. Cost aside, final product processing at the store level is unwanted because it increases health safety risks and decreases shelf life. The fresh meat segment of food retail is bifurcating between specialist butcher shops and pre-packed, providing structural growth for Hilton.
Within Hilton’s current geographic scope, it should continue to grow low to mid-single digits per year, based on market share gains and product line extensions. Stores in existing geographies are still being switched over from butcher to pre-packed. The variety of seasonal products Hilton can offer is expanding.
Regarding new geographies, the obvious near-term possibilities are Australia, Portugal, Belgium, and the US. Management has commented that the reason they currently have a net cash position is because they expect to invest it in these geographies. Estimates for these prospects:
Based on those estimates, that works out to total earnings growth of £14m, or 42% over 2016E EBIT of £33m. The total potential is from those opportunities £34m, or double current EBIT.
Hilton is already working with each of these retailers in one form or another. In the case of Ahold, where a US entry for Hilton is possible as part the post-merger integration of Alhold/Delhaize, the partnership started in 1999.
Beyond the clearly identifiable, I believe Germany, Switzerland, and Canada are also each suitable geographic candidates for Hilton, though I am aware of no current plans to enter those markets.
The share price has done well over time and the few covering analysts like the company. In my view, however, the market underrates the economics of the business. One reason for this could be the customer concentration risk and low margins, things frequently associated with bad businesses. In regards to the risk customer loss, Hilton is the opposite of its peers. Its model takes years to build up, but once accomplished is robust. Regarding the low gross margins, I would argue it’s a bit deceiving as Hilton often does not take inventory risk. In Australia (an unconsolidated JV with Woolworths), the revenue model is a management fee, with no cost of goods running through the JV’s P&L. Of course for customer discussions, it’s in management’s interest to represent the financials in a way that shows a low margin – and not focus on ROIC.
A second reason for undervaluation could be that analysts include cost of business development in their forecasts but exclude the benefit. The Portugal JV with Sonae is a current example of how this impacts the financials. Consensus expectations (5% annual growth in net income for 2016-2018) exclude the possibility of expansion of the business as outlined above, despite Hilton’s compelling value for its customers and its \track record.
Geographic expansion announcements
Are you sure you want to close this position HILTON FOOD GROUP?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea HILTON FOOD GROUP for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".