Description

Overview

Dole PLC is a busted IPO. Its stock listed in July 2021 at a price range that initially was set between $20-$23, then reviewed to $16-$17 during the bookbuild phase, then the stock declined to $14.5 on the first day of trading for limited fundamental reasons and today the stock is trading at $9, which puts the business on a 7x PE multiple. 

Dole merged with Total Produce, a company that was listed in Ireland, right before relisting to the US, and, after the merger, the combined company became the global leader in fresh fruits and vegetables.

I estimate a fair value to be in a range closer to the initial IPO range ($20-$25), implying an upside north of 100% with opportunities coming from synergy realization, increased liquidity in the US market, and resolution of temporary issues. 

Quick Background

Dole Plc is a recently formed entity, the product of the merger between Total Produce (TP), a Dublin-Ireland based company that was listed in Dublin until July 2021, and Dole Food Company (DFC), a private company. The integration between the two started in 2018, when Total Produce acquired a 45% stake in DFC, with the remaining 55% owned by billionaire David Murdock's Castle & Cooke. 

In Dublin, TP had a market cap of ≈€1bn ($1.2bn). As the stock was delisted in July 2021, TP shareholders received 1 share of Dole for every 7 shares of TP they owned. At IPO, old TP shareholders owned ≈60% of Dole, new shareholders owned 27% and David Murdock’s C&C 13%. Now the market cap is $870m and the main shareholder remains David Murdock with 13%, Balkan Investments (Total Produce management) with 7%, Taylor Foods with 5.7% (and Capital Group with 9%). 

Quick note on Taylor Foods: two months ago, Bruce Taylor of Taylor Farms bought 5.7% of shares outstanding. Taylor Foods is a producer of fresh-cut fruits and vegetables, and Bruce Taylor previously had also founded and was the CEO of Fresh Express, (a producer of salad bags, now owned by Chiquita). The company hasn’t released any comments about this. 

Before the listing in NY, Total Produce was covered by three analysts and liquidity in Dublin was about $3m per day. Right before it relisted, however, liquidity had increased significantly to an average of $20m and the stock declined 24% in a week, as the IPO range was revised and from outflows from passive players and funds that couldn’t own non-European stocks. The IPO range was revised in a context of large supply in US IPOs at the same time of Dole’s IPO. In addition, US investors asked for a discount vs the implied price of Total Produce and looked at the company valuing it against Fresh Del Monte (a smaller, lower quality peer). By the way, if we valued Dole in comparison to FDP today, we'd still get roughly a 40% upside.   

After the IPO, the stock declined further, partly with the overall market but in addition, the company had some issues with a listeria contamination which caused site closures and product recalls in the Fresh Vegetables division (an investigation concluded that contamination was likely from outside the processing plant, and now Dole is back at full capacity). This took longer than what the company anticipated initially, and FY2022 profitability was impacted. However, these should be temporary factors and, once resolved, Dole’s valuation should close its gap to peers. 

Fundamentally, the merger has created the global leader in fresh fruits and vegetables, with 2021 revenues of $9.3bn and $394m of EBITDA. After the IPO completion, Dole will now have a stronger balance sheet and will benefit from the integration: the two companies are highly complementary, synergies are achievable; insiders own 19% of the company and management has a good track record of under promising and overdelivering. 

When the merger was announced in February 2021, the stock of Total Produce reacted with a +40% in a matter of days. 

Now, at $9 per share, Dole is at less than 6.7x 2022 EBITDA and 10x 2022 EBITDA less Capex, whilst peers Calavo and Mission Produce trade at 21x and 18x 2022 EBITDA respectively, and even lower quality peer Fresh Del Monte trades at 10.8x 2022 EBITDA. I believe that downside is very well protected from current valuation levels and even in a conservative valuation exercise I see at least 40% upside from here. 

Description

Dole is the world global leader in fresh fruits and vegetables, offering 300 products grown and sourced both locally and globally from over 30 countries in various regions, which are distributed and marketed in over 80 countries, across retail, wholesale, and foodservice channels.

The company sells in over 75 countries, but primarily operates in North America and Europe, markets that have an addressable market of $335bn with $139bn of sales in NA and 196bn in Europe. The market is expected to grow at a 2.7% CAGR to 2025, with NA growing at 3.4% and Europe at 2.1%. Trends supporting health and wellness should support this growth, with some categories such as berries, avocados, organic produce, and value-added salads growing in the high single to low double digits. 

Dole is the largest player in the market, 1.7x the size of its biggest competitor, Belgium-based Greenyard NV and more than double the size of US-based Fresh Del Monte. Dole is the market leader across several product categories: it’s number one and two for bananas in NA and Europe respectively, number two for pineapples in both markets, number two in Value Added Salads in the US and number one global exporter of grapes. Dole has also increased its presence in berries and avocados and organic produce, the fastest growing categories. Size clearly represents an advantage, enabling the business to extract operational efficiencies and maintain a low-cost positioning that benefits the company from a competitive standpoint:

Dole also benefits from a vertically integrated business model that gives them control over their operations: the combined operating assets include 250 facilities, 114k acres of owned farms and other land holdings, they also own 13 vessels, 5 salad manufacturing plants, 12 cold storage facilities and 75 packing houses. These assets provide flexibility, product availability, certainty of distribution, and supply chain control. Also, even if clearly the sector is highly competitive, having a recognizable brand like Dole represents a marginal advantage.  

Dole has four reporting segments: Fresh Fruit, Diversified Fresh Produce EMA; Diversified Fresh Produce Americas and RoW, Fresh Vegetables. In 2021, revenues were $9.3bn and EBITDA $394m

Total Produce historically had grown by 2-3% organically and, in addition, M&A has been a growth driver for both DFC and TP. Total Produce, over the 15 years, after the business had separated from parent Fyffes, completed more than 100 acquisitions. These included bolt-ons and more strategic investments such as the investment in DFC. In that period (2006 to 2020) TP revenues more than tripled to $7bn. Dole will use its platform to further consolidate a very fragmented sector and grow in faster growing segments. With the IPO, Dole has raised capital that has reduced leverage which now sits at 3.3x (target at 3x), but also a new financing agreement that reduced its cost of capital.  

Furthermore, the combination of TP and DFC also brings the opportunity to generate synergies, with the two companies being highly complementary in terms of products and geographical exposures (Total Produce was more exposed to European Markets and DFC more US).  Dole is targeting an increased utilization of the Dole brand in underpenetrated geographies (the ones that were served by TP). In addition, scale and a wider network will help in sourcing and logistics. Management is targeting EBITDA synergies between $30m and $40m in the medium term. Let’s consider that the combined SG&A expense was $465m in 2020: even in their upper range, synergies represent less than 10% of this. I believe this is a conservative target, and that management is under promising as they’ve done in the past. In their last update (Q1 22) the company said synergies and integration are progressing as planned. 

Valuation

So, the company is guiding for $9.4bn to $9.7bn of sales in 2022, $350m-$370m of EBITDA, capex of $125m, interest expense of $45m and tax rate between 23% and 27%. If we take the mid-point, we get to a net income of ≈$125m vs a market cap of $870m and EPS of $1.29 with a share price of $9 or ≈7x PE. Dole has $1.2bn of debt on the balance sheet, $130m of noncontrolling interest and there are small other liabilities (including pensions and $7m of earnout liabilities), so the EV today is ca. $2.4bn. On 2022 numbers, EV/EBITDA is 6.7x and the EV/(EBITDA-Capex) multiple is roughly 10x.

2022 guidance includes a $35m EBITDA impact from a product recall and temporary closure of two of its salad facilities in December 2021 for a listeria contamination. The loss was initially estimated at $25m then revised to $35m as it took longer to recover lost shelf space and Dole sustained higher costs than expected. However, management is confident that the Fresh Veg business will return to previous levels of profitability, around $40m. If we assume that this was a one-off, and with synergies support of additional $30m-$40m, mid-term EBITDA should be north of $400m. That brings the valuation to 6x EV/EBITDA, 8.7x EV/EBITDA-Capex and 5x PE. 

Dole should be able to generate low double-digit ROCE and ROE and grow in the low to mid-single digits. A DCF using 10% cost of capital (quite punitive assumption, as net cost of debt is ca. 3%) and 2% growth points to a $20 per share valuation. Historically, Total Produce traded at ca. 12x PE on average over the last seven years, and 15x+ in 2021 after the merger was announced. It was also trading at low teens on an EV/EBIT basis. On these levels, we’re still looking at a 100%+ upside from current levels. US listed peers trade on average in the high teens on a PE basis and low to mid-teen on an EV EBITDA basis, which also point to 100%+ upside from current levels. Even if we take their cheapest peer Fresh Del Monte, that trades at 9x 2023 EV/EBITDA, Dole is still 30-40% cheaper and it’s a larger and better managed business.  

Management

Carl McCann was the chairman of Total Produce and is the Chairman of Dole, he has ≈$10m personally invested in the company (in addition to his share of his family’s stake) and he’s part of the McCann family, that started the business in the 1850’s. In 1902, Charles McCann (Carl’s grandfather) established a shop in Dundalk, Ireland, before his son, Neil McCann, took the helm of the business in 1954. Neil then merged with similar wholesalers across Ireland establishing Ireland’s largest fresh produce provider and TP has grown since then, expanding internationally. The McCann Family’s investment vehicle, Balkan Investments, owned 12% of TP and will own ≈7% of Dole in turn. Rory Byrne, who was the CEO of TP, is CEO of Dole and has a stake in the company worth $6m+, which I believe represents the majority of his net worth. He was internally appointed 15 years ago. TP’s former CFO Frank Davis, who has been in the CFO seat for 12 years, has taken the Dole CFO seat and DFC’s COO Johan Lindèn, is now the COO role at Dole. This management team is well respected, among the best in the industry and has a long track record of managing the business for the long term (as one would expect from owners-operators), guiding conservatively and delivering above expectations. I think that the announced synergy target reflects this conservatism.

Catalyst

• Relisting from Ireland to the US with increased liquidity and a clearer set of peers
• recovery of fresh produce business
• Delivery of synergies