Good summary on $dole, agree with your overall assessment. I also read your initial write-up as I researched the name recently.
US investors are notoriously inward-looking and often gave an initial cold shoulder to companies listed overseas, even though Dole is as America as it gets.
I would hesitate to tag 14x as the base case, but I do think 8-10x would be a very reasonable range, which offers decent upside potentials.
All in all an excellent job finding this hidden gem. patience is (fortunately) unfortunately very much needed in this case. Cheers
Essentra is an interesting opportunity - took a hard look at this one back in Sept / Oct and spoke to one of their bankers about breaking up the company...was surprised to see their announcement just a few short weeks later. In my view, current management has done a good job at streamlining and improving the quality of businesses over past few years. On consensus numbers, this one trades much cheaper - around 7x, due to expectation of improved performance in healthcare packaging segment.
For this one to re-rate, Filters needs to be sold - the marginal institutional UK / European buyer won't touch this due to ESG and the tobacco exposure here. But the growth opp in this segment is compelling, with the premium filter business in China and adoption in EU market of biodegradable filters, as regulations on plastic filters are changing in 2024-25.
Healthcare packaging has been a hot mess in recent years but their acquisition in Sept '20 looks like a great move as they bring on strong operators in North America. So far, they've provided great disclosures on improvements made to this business and even recently remain committed to margin targets, even with cost and labor inflation creeping into this biz, which I doubt they'd do unless super confident about their ability to perform. Currently this is a 4% EBITDA margin business, and management has guided to 8% to 10% improvement next year. Longer-term, this should be a 10% to 12% EBITDA margin business, so the margin expansion opportunity is very real here and will simply come down to shifting out of restructuring mode and getting some operating leverage on the business. Will just take time for performance to flow through the financials and market has been burned before by them, so will take some time to believe margins are sustainable. And this is a highly-fragmented industry with loads of opportunity for consolidation. Always envisioned them growing this to critical mass and then spinning this off from Industrial, but think that would take a few years, which is why the announcement surprised me.
And for industrial distro segment, this one has fantastic margins and seems well-positioned post-Brexit. They'll just need to return this to growth which can be done by bolt-on deals, as they play in a highly-fragmented market. Organic growth has been a weak point, though, I think.
Your initial valuation work is reasonable in terms of the upside opportunity here.
Do other original holders of Total Produce also have problems selling Dole Plc following the merger? According to my broker, Euroclear does not allow to make the converted shares tradeable in the US as they are registered in Ireland.
Hey Roman. The question of "opportunistic share re-purchase" as a potential tool for capital allocation given the current stock price was raised quite early in the Q&A of the latest earnings call. CEO Rory Byrne answered and I quote, that
"obviously we keep our eyes on all of the potential capital allocation opportunities open, including buy-backs. And in some ways it is a bit contradictory to have just recently IPO'd the company, [and then] to start to buy back very quickly. But there is no doubt that we will keep that tool in the tool-box as an alternative, and clearly at the current rating, it is difficult to buy even small companies at that value level [in the context of mergers & acquisition], let alone the biggest company in the world. We're well aware of the dynamics, and we keep our eye on it. It is one of the elements of capital allocation that over the medium-long term is there for us to use."
Thanks for the detailed response, Conor. It makes sense that they don't want to repurchase shares so soon after the IPO. Nonetheless it would be the most efficient use of capital, in my opinion.
Roman thanks for reading. Regarding buybacks, as Anders above has commented this was the second question during the Q&A on the earnings call, and I see Anders has posted CEO Rory Byrne's response above. My take - its probably a little premature to initate buybacks after IPO-ing less than 5 months ago, and dividend is viewed as the primary capital return mechanism by management, consistent with their approach managing Total Produce before this. If cash generation increases in FY22 with higher produce prices locked in and costs under control leading to some surplus cash, perhaps it becomes a more interesting tool at that point. I would doubt management would lever up to do a buyback as they are a conservative team.
Good summary on $dole, agree with your overall assessment. I also read your initial write-up as I researched the name recently.
US investors are notoriously inward-looking and often gave an initial cold shoulder to companies listed overseas, even though Dole is as America as it gets.
I would hesitate to tag 14x as the base case, but I do think 8-10x would be a very reasonable range, which offers decent upside potentials.
All in all an excellent job finding this hidden gem. patience is (fortunately) unfortunately very much needed in this case. Cheers
Siyu
Essentra is an interesting opportunity - took a hard look at this one back in Sept / Oct and spoke to one of their bankers about breaking up the company...was surprised to see their announcement just a few short weeks later. In my view, current management has done a good job at streamlining and improving the quality of businesses over past few years. On consensus numbers, this one trades much cheaper - around 7x, due to expectation of improved performance in healthcare packaging segment.
For this one to re-rate, Filters needs to be sold - the marginal institutional UK / European buyer won't touch this due to ESG and the tobacco exposure here. But the growth opp in this segment is compelling, with the premium filter business in China and adoption in EU market of biodegradable filters, as regulations on plastic filters are changing in 2024-25.
Healthcare packaging has been a hot mess in recent years but their acquisition in Sept '20 looks like a great move as they bring on strong operators in North America. So far, they've provided great disclosures on improvements made to this business and even recently remain committed to margin targets, even with cost and labor inflation creeping into this biz, which I doubt they'd do unless super confident about their ability to perform. Currently this is a 4% EBITDA margin business, and management has guided to 8% to 10% improvement next year. Longer-term, this should be a 10% to 12% EBITDA margin business, so the margin expansion opportunity is very real here and will simply come down to shifting out of restructuring mode and getting some operating leverage on the business. Will just take time for performance to flow through the financials and market has been burned before by them, so will take some time to believe margins are sustainable. And this is a highly-fragmented industry with loads of opportunity for consolidation. Always envisioned them growing this to critical mass and then spinning this off from Industrial, but think that would take a few years, which is why the announcement surprised me.
And for industrial distro segment, this one has fantastic margins and seems well-positioned post-Brexit. They'll just need to return this to growth which can be done by bolt-on deals, as they play in a highly-fragmented market. Organic growth has been a weak point, though, I think.
Your initial valuation work is reasonable in terms of the upside opportunity here.
Great article Conor.
Do other original holders of Total Produce also have problems selling Dole Plc following the merger? According to my broker, Euroclear does not allow to make the converted shares tradeable in the US as they are registered in Ireland.
Sorry Lupo, I'm not familiar with this issue but your broker should be able to advise you on this.
Great update about Dole, Conor. Wouldn't it be a good idea for Dole to initiate a share buyback program at current prices?
Hey Roman. The question of "opportunistic share re-purchase" as a potential tool for capital allocation given the current stock price was raised quite early in the Q&A of the latest earnings call. CEO Rory Byrne answered and I quote, that
"obviously we keep our eyes on all of the potential capital allocation opportunities open, including buy-backs. And in some ways it is a bit contradictory to have just recently IPO'd the company, [and then] to start to buy back very quickly. But there is no doubt that we will keep that tool in the tool-box as an alternative, and clearly at the current rating, it is difficult to buy even small companies at that value level [in the context of mergers & acquisition], let alone the biggest company in the world. We're well aware of the dynamics, and we keep our eye on it. It is one of the elements of capital allocation that over the medium-long term is there for us to use."
Cheers.
Thanks for the detailed response, Conor. It makes sense that they don't want to repurchase shares so soon after the IPO. Nonetheless it would be the most efficient use of capital, in my opinion.
Roman thanks for reading. Regarding buybacks, as Anders above has commented this was the second question during the Q&A on the earnings call, and I see Anders has posted CEO Rory Byrne's response above. My take - its probably a little premature to initate buybacks after IPO-ing less than 5 months ago, and dividend is viewed as the primary capital return mechanism by management, consistent with their approach managing Total Produce before this. If cash generation increases in FY22 with higher produce prices locked in and costs under control leading to some surplus cash, perhaps it becomes a more interesting tool at that point. I would doubt management would lever up to do a buyback as they are a conservative team.