We often take for granted the fresh fruits and vegetables that line the supermarket shelves, not giving a thought to how the produce might have travelled halfway around the world to for us to enjoy. Chances are a lot of it will have found its way into our shopping baskets through a dual-listed Irish company called Total Produce (TOT), which grows, sources, imports, packages and distributes fresh fruits, vegetables and flowers to supermarkets, wholesalers, food service providers and processors across Europe and North America. And given the success of the company's acquisition-based growth strategy, supported by a solid balance sheet, we believe the shares could offer investors some tasty long-term returns.
- Rising consumption of fruit and vegetables
- Growth through acquisitions
- Fragmented market
- Barriers to entry high
- Low valuation
- Operates in a mature market
- Pricing pressure from UK retailers
- Vulnerable to outside factors
The business isn’t terribly glamorous, but it’s well-established and benefiting from two global trends. The first is how governments are encouraging their citizens to lead healthier lifestyles by eating more fruit and veg. The other is the breakneck speed at which the global population is ballooning. Both themes mean Total has a virtually guaranteed, steady and rising demand for its products. But the industry is mature and organic growth hovers around the not-especially-impressive 1-to-2 per cent mark. But armed with a solid balance sheet and healthy cash generation, Total has delivered superior earnings growth through acquisitions.
Since 2007 it has spent roughly €128m buying rivals, which helped produce a 5 per cent compound annual EPS growth rate. Most recently, the group agreed to take a 65 per cent stake in US-based Oppenheimer group, marking its first foray into North America, which should act as a springboard for further acquisitions in the region. And with the global sector still very fragmented, there’s plenty of scope for more consolidation. Analysts at Goodbody have calculated spending between €100m and €300m (£253m) on acquisitions over the next five years should add an extra 4 to 10 per cent to its forecast annualised EPS growth of 2.6 per cent, while still keeping debt under control.
| TOTAL PRODUCE (TOT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 69p | MARKET VALUE: | £228m | |
| TOUCH: | 68-70p | 12-MONTH HIGH/LOW: | 69p | 38.5p |
| FWD DIV YIELD: | 2.8% | FWD PE RATIO: | 9 | |
| NET ASSET VALUE: | 56¢* | NET DEBT: | 30% | |
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit** (€m) | Earnings per share** (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 2.34 | 35.9 | 6.84 | 1.78 |
| 2011 | 2.28 | 31.7 | 7.30 | 1.89 |
| 2012 | 2.43 | 36.0 | 8.00 | 2.08 |
| 2013** | 2.73 | 40.0 | 8.60 | 2.20 |
| 2014** | 2.77 | 41.6 | 8.90 | 2.30 |
| % change | +1 | +4 | +3 | +5 |
Normal market size:1,000 Market makers: 5 Beta:0.09 *Includes intangible assets of €146m or 44¢ a share, ** Goodbody forecasts, underlying PTP and EPS figures £1=€1.17 | ||||
There are a few caveats. The first is Total's exposure to the UK, which accounted for roughly one fifth of total revenue last year. Here, fierce competition between supermarkets is exerting an enormous amount of pricing pressure on suppliers. That said, weakness in the UK is being more than offset by robust growth in the Eurozone and Northern Europe, which together account for the vast majority of group's revenue and over 80 per cent of operating profit. A further possible headwind is the group's vulnerability to factors beyond its control, such as poor harvests which affect commodity prices, shipping costs and food scandals - in 2011 sales suffered in Europe due to an e.coli scare.
Still, these risks look more than priced in. Despite having risen over 50 per cent since the start of the year, the shares are trading on a forward PE ratio of just 9, which is a considerable discount to the peer group. There is also a decent and well-covered dividend yield on offer too. The company also boasts some noteworthy barriers to entry based on its state-of-the-art infrastructure, with highly-technical logistics operations to ensure produce is kept at exactly the right temperatures and of the highest quality. And while there are external risks, the business is reasonably well diversified business across a number of divisions, such as a small health foods and consumer goods business and in-house packaging services, offering clients customised packaging solutions.
