Description

Fyffes is an undervalued play in the lucrative banana and fresh produce market in Europe, with the best balance sheet in the industry. After backing out cash and surplus real estate being marketed for sale, Fyffes trades barely above book value and a mere 6.4x free cash flow multiple! Far too cheap for a moderate grower with a politically protected position.


Fyffes holds a close #2 market share in European bananas with 17% vs. Chiquita at 20% and just ahead of Dole at 15%. Unlike Chiquita, however, Fyffes has no primary production operation and therefore has minimal cap ex requirements. Neither does it endure the management challenges of dealing with the volatile labor situations on these banana plantations.
Rather, they operate through long term supply contracts, with half coming from Latin America and the rest from EU, Caribbean and Pacific suppliers.

The Fyffes, Turbana and Coplaca brand names are well known in Europe. and, in other fruits, Cape, Outspan, Carmel, Enza, Jaffa, Maroc and Zespri.

Distribution Network - 70 state of the art facilities across Europe.

Management: The McCann Family has been running the company since the 1950's and is the largest shareholder in the company.

Organic top line growth of 2-4% supplemented by acquisitions.

There was a rewarding (although somewhat aggressive)writeup on Chiquita over the summer that delved into some of the background on the industry.

Website: http://www.fyffes.com/home

trades on Irish stock exchange and in London, on Pink Sheets in US


Shares out 345,911,559
Market Cap EU 564m
BV 1.537 e
EPS .142 2002
.133E 2003 hurt by heatwave
.147 2004 = broker estimate
Div Yield 3.5%
Cash 180m + 30-35m surplus property = 210 = 60c per
share at ear end


Valuation:
ex an E8m negative effect from the historic heat wave in Europe over the summer, Fyffes was projecting about E75m in EBITDA this year. I have not adjusted this number for the recent trading statement, which indicated a stronger than expected fourth quarter.


EV/EBITDA
at current prices Fyffes is currently valued at 4.7x

EV/Free Cash Flow:
maintenance cap ex is estimated at 5-10m euros. If we assume 10m, then
Fyffes is trading at 5.4x

Equity Free Cash Flow After Tax per share
75m
- 10m cap ex
- 11m taxes

= 54m / 346m = .156 share

If all the cash were paid out, this level of free cash flow would more than justify current share price. At 1.62, backing out 60c of cash and excess property, you are paying only 6.4x cash coming in.

Takeout Value?
The author of the Chiquita report on VIC asserted that Dole was taken out by management at 7.5x. One might assume also that an insider deal represents the lower end of what might be received in a third party transaction.

75m x 7.5 = 563m + 210m (cash and prop) = 773m /346m = 2.23 share
x 9 = 675m + 210m = 885m/346 = 2.55 share

Catalysts:
Buyback/Special Dividend - the company has been hoarding cash in the hopes of participating in the consolidation of this industry. I think the company is getting tired of earning a tiny return on its cash. Management has given me the impression that they will either execute a significant acquisition, or return the cash to shareholders. A corporate action that would put the excess cash in the hands of shareholders could put the stock to 2 euros or higher quite quickly. A 10x FCF multiple (1.56)on the stub + 60c of cash gets you there.

Consolidation: Management has been quite open about the need for industry consolidation. While they would most probably prefer to be the surviving entity, they have expressed a willingness to participate on either side for the right deal. I believe Fyffes was considering an acquistion of Chiquita, but have probably been priced out of that opportunity. The synergies that would result from that combination, however remain compelling. With Chiquita's success at reducing debt and shedding excess assets, it's market cap is now comfortably ahead of Fyffes'. Perhaps Chiquita's reluctance to pay dividends or buy back stock is a signal that industry consolidation lies ahead? Whether or not Fyffes is a target itself, a significant deal would be very positive for all the players.
Interestingly, patriarch Neil McCann relinquished his Chairman's role a few weeks ago, which could be another tell.

Lawsuit - the company is pursuing a lawsuit against a former director on an insider trading rap. They believe this director reaped an 85m euro profit, which, under Irish law would be turned over to the company if successfully adjudicated. I have no idea what the chances of winning are, but it is a potential windfall that the market isn't paying anything for at the moment.


Risks
strength in USD. Every 10% decline in the dollar vs. the euro adds about
2% to earnings. Should the recent strength in the dollar reverse, they will lose that benefit. There should be some cushion in a $75m EBITDA # , however as I haven't factored in an uplift from recent $ strength.

An unexpected change in European banana regime. The current regime runs through 2006. Consolidation of the market before that time could mitigate the effect of disruptive changes.

Catalyst

Further rationalization of the industry
major buyback/special dividend
sale of the company