Description

I have found a classic Ben Graham “net-net” that also happens to be profitable. In fact, EBITDA here is GREATER than enterprise value.

G. Willi-Food International is an Israeli-based food importer with $11mm in cash, no debt, and a market cap of $13mm. The company has consistently produced annual operating income between $2mm to $3mm since going public in 1997 which has resulted in almost the doubling of shareholders equity through retained earnings. Meanwhile, the quoted market value of the company has declined over 40% since 1997. There is one institutional shareholder, no investor conference calls, and a whole 19 shareholders of record that own the stock. Despite the poor showing in market value, management interests should be closely aligned with fellow shareholders as they owns close to 80% of the company. I think buying an interest in the company today presents investors with a tremendous margin of safety and significant upside in the coming years with share buybacks or a going private transaction likely.

The Business: low capital requirement, boring, recession proof, predictable niche business.

G. Willi-Food International imports over 400 items from around the world and markets and distributes them to over 600 customers in Israel including food retailers, wholesalers, and institutional customers. The products with the largest sales volume include canned vegetables (22% of sales), canned fish (19% of sales), dairy products (11% of sales) and edible oils (9% of sales). This is a low capital requirement, boring recession proof (unless people stop eating) business that primarily relies on having the right supplier relationships (have over 150) and distribution relationships (branded supermarket chains account for 41% of all sales). The company differentiates itself from its competitors by distributing certain items on an exclusive basis and by marketing under the brand names Willi-Food, Willi-Dag, Gold Frost (the Company purchased Gold Frost in 2001) in addition to private label marketing. Additionally, the company’s products are also sold, in insubstantial volume, in areas administered by the Palestinian authority and to a few market outside Israel (Europe, South America). Because the company sells almost all its products in Israel, they must be approved as Kosher under the supervision of various Jewish organizations.

Compelling valuation: Nowhere to go but up.

Below I have listed the balance sheet as of September 30th, 2003 and the major components of the income statement for the last five years (1 U.S. Dollar = 4.44 Israeli New Shekel). Free cash flow closely tracks net income as depreciation and capex requirements are roughly the same so I have not presented the cash flow statements.



Balance Sheet:

9/30/03 ($mm)
Cash 11.0
Trade receivables 7.0
Inventories 4.4
Other 0.6
CA 23.0

PPE 0.6

Total Assets 23.7

($mm)
Trade Payables 3.2
Other 1.2
CL 4.4

Total Liabilities 4.4

Shareholders Equity 19.3

With 4.27mm shares outstanding, you have a consistently profitable company that is trading at 2/3rds of its working capital with cash making up the dominant bulk of it.

Income Statement ($mm):


1998 1999 2000 2001 2002 YTD
Sales 33.65 31.65 30.84 30.53 29.58 23.23
Operating Income 3.51 2.80 2.50 2.52 2.18 2.10
Net Income 1.87 1.89 1.89 1.98 1.62 1.55

Shareholders Equity 9.82 12.49 14.39 16.37 18.00 19.27



The only negative to this story (besides some of the risks I will outline below) is the negative trend in operations. Cumulatively through 2002, sales have declined 12%, operating income 38%, and net income 13%. Management has attributed this across the board decrease mainly to the Israeli economy (recession, decrease in real food prices, etc). It is my understanding that the worst may now be behind, and the Company will be able to start growing the business going forward. Fortunately, because of the balance sheet, one doesn’t need to rely on this prediction for this investment to be considered a bargain.
Discounted Cash Flow:

I have run a 5 year worst case and base case DCF scenario. I have presented the summary form here.

Worst Case:

Assumptions

Yearly revenue growth: -5%
Net Operating margin: 5%
Working capital as % of revenue: 24%
WACC: 10%
Capex = D&A


For the worst case model, the 5th year revenue is $21mm and NOPAT is 690K. After year five, I assume the company earns their cost of capital and that incremental working capital is zero.

Output:

Discounted 5 year FCFF: $4.10
Discounted Corporate Residual Value: $4.49
Plus Short Term Assets: $23.0
Less Debt: -
Less Preferred Stock: -
Less Short Term Liabilities: ($4.40)
Total Value to Common Equity: $27.19
Intrinsic Stock Value: $6.32
Potential Return 113%

Base Case:

For the base case scenario, I changed the yearly growth rate assumption to 3% and the operating margin assumption to a more plausible 8% range. The 5th year of revenue is $31.5mm and NOPAT is $1.67mm.

Output:

Discounted 5 year FCFF: $5.1
Discounted Corporate Residual Value: $10.7
Plus Short Term Assets: $23.0
Less Debt: -
Less Preferred Stock: -
Less Short Term Liabilities: ($4.40)
Total Value to Common Equity: $34.5
Intrinsic Stock Value: $8.03
Potential Return: 170%



Management: Reasonable salaries and minimal options.

Zvi Willinger and Joseph Williger are brothers who are respectively, COO and CEO of the Company. They control the company through their investment firm Willifood Investments. Each get paid 210K per year and an annual bonus equal to 3% of the Company’s pre-tax annual profits or 5% of profits when profits exceed $633,000. Option issuance has been minimal over the firms 7 and half year history with only 130,000 options being exercised to date ($390k charged to income over the vesting period) and 50,000 options outstanding (weighted average strike price of 4.10).


Risks:

Limited float – only 11% of the float is held in the U.S. Trading volume here is light.

Misallocation of cash - In March of 2000, at the top of the market, management received authorization to invest up to $4mm in businesses engaged in “communications or HI-Tech activities”. Fortunately, this never happened but they still have the authorization should they wish to pursue this course of action.

Customer concentration – 3 largest customers (Grocery chains) accounted for 41% of the companies sales in 2002.

Currency risk


Conclusion:

Warren Buffet once compared investing to Olympic diving by saying that unlike diving, investors don’t get extra points for making things difficult. I think the level of difficulty involved with this investment is extremely low. Eventually, the value that has been built up since the Company went public will be quoted and the investors who are small enough to participate in this neglected equity will be rewarded.

Catalyst

Organic cash growth over the years will eventually be realized through investor recognition of intrinsic value, share buybacks or a full buyout of the company.