Description

Amira Nature Foods-- ANFI ($8.09)

ANFI is a packager and seller of rice, primarily premium basmati rice (about 70% of volume). ANFI ages (this takes 12 months or so), processes, packages and sells the rice (it does everything but grow it).  The company sells its rice in 40 countries, using its own brand in 25.  This type of rice is only grown in one region in India/pakistan, so it is unlikely that a large amount of supply could come easily and quickly on the market from new areas of the world.

Recent revenue growth (over last 2-3 years) has been 25-30%.  In addition to forward revenue growth expected at a similar pace, margins will also improve through: 1) scale, 2) greater contribution from international sales which are higher margin and 3) the opening of a new distribution center which will double capacity and reduce the need to purchase some semi-finished product from other parties. 

Results from the recently reported September quarter were terrific with revenue exceeding analyst forecasts by 15-20% and eps of close to 2x the forecast.  Yet you would not know any of this from the stock chart, with the stock trading close to its low and 20% lower than its IPO price.  These kinds of situations always interest us:  here is a company which is off the radar, extremely cheap on an absolute basis, whose fundamentals are moving "up and to the right" (and above concensus), while its stock price has headed lower. 

The stock is now selling for less than 7x 2013 earnings and close to 5x 2014 eps.  This is a growth company, not a cyclical agricultural processor, management owns 75% of the stock, the category is growing close to 20% and the product the company sells is something of a staple which is unlikely to see a significant downtick in demand in a global recession scenario. 

I believe there are two reasons why this stock is so cheap:

1) confusion over whether this is a consumer product company (that could attract a mulitple similar to that of BNNY or HAIN) or an agricultural processor (which should be accorded a single digit multiple).  I believe this has caused the market to err on the side of caution regarding valuation.  What is being overlooked is that, unlike an agricultural processor, this company has great growth characteristics.  There are some headwinds on the valuation insofar as it is a single product company and it headquartered in Dubai, but I think a more reasonable valuation for this business is 15x-20x. 

2) the second reason the stock is so cheap is likely because the CFO resigned at about the time that the September results were announced.  The company has indicated that this was becaue of a medical problem.  While always concerning, given that 4 i-banks have recently (hopefully) scoured the financials, the debt refinancing will also mean the financials will be scoured, the new CFO seems to have a solid pedigree, and the significant insider ownership, we are not overly concerned. 

This appears to be a classic case where the perception, which is now indifferent/negative will likely gradually (or perhaps not-so-gradually) shift more positively (perhaps even picked up by the momentum crowd) as the company executes and the story gets out.  ANFI could easily be a 2-4 bagger over the next 18 months as this unfolds.  With management (principally the CEO) owning 75% of the stock, I believe they are aligned and intent on making this happen (as an aside the CEO did not sell shares in the IPO; the proceeds went all to the company).  I could see the stock easily trading at 15x 2014 eps of $1.60 or 3x the current price one year from now (note for 2014 eps, I am using my F2015 number as FY ends in March).  This is still a significant discount to the likes of BNNY, MKC & HAIN (which trade at 20-40x) and to its growth rate of 25-30%.

Upcoming catalysts:

1) Management has indicated it is currently looking to refinace its debt with an anticipated reduction of 300-400 basis points.  Here is what they said on the recent call regarding reducing the cost of debt:

"We hope to start working on that post this earnings release and hopefully announce some good news in the near future. Those numbers are not

modeled in, are not forecasted at this stage. At the time of the IPO, also, we said that this is additional upside to the investor. And with it, 3% to 4%

points benefit. That is substantial upside from an EPS perspective"

3) Potential to reduce tax rate.

4) Continued strong (above-concensus) results over the next several quarters, with strong revenue growth and expanding margins, all line items moving in the right direction and above concensus, and a dirt cheap valuation, should attract value and momentum investors alike.

Risks:

1) As mentioned, The CFO recently resigned.  While it is hard to say for certain that there was nothing else going on here, the new CFO has a solid background (Accenture and Yum Brands) and management continues to own a large percentage of the shares, without having monetized any holdings to-date. 

2) This is a one-product company (primarily), so any disruption in supply or export rules within India could be a material negative.

Catalyst