G WILLI-FOOD INTL LTD WILC
May 23, 2014 - 4:59pm EST by
RoboCop
2014 2015
Price: 6.50 EPS $0.71 $0.00
Shares Out. (in M): 13 P/E 9.2x 0.0x
Market Cap (in $M): 84 P/FCF 0.0x 0.0x
Net Debt (in $M): -62 EBIT 8 0
TEV ($): 23 TEV/EBIT 2.7x 0.0x

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  • Israel
  • Micro Cap
  • Food distributor
  • Complex holding structure

Description

Long WILC, a cheap microcap Israeli based food distributor. WILC is valued cheaply (and has always been valued pretty cheaply) due to governance and capital allocation concerns. See previous VIC write-ups for history about the company’s lack of prudent capital allocation.  Management always seems to be promising that there will be an acquisition of a U.S. based distributor or a dividend right around the corner, but nothing ever seems to materialize. Recently in March of 2014 a change in control of the managements’ investment vehicle (through which they own a majority of WILC shares) has caused more concern in this regard.

Why Bother (It’s Super Cheap)

I own this investment despite some of the governance risks I will get to below because it is a good business that is selling very cheaply.

MV: $84M Net Cash $62M ($4.76/sh, 73% of MV), EV $23M

Good Company

 Gross Margins: 23-25%, ROA (Ex cash): 15%, ROE (with cash): 9%, growth profile 5%+

Due to the company’s large cash position, the company is selling at pretty ridiculous EV multiples:

TTM: EV/EBIT 2.7, EV/NOPAT 3.5

The company is cheap even if the company’s history scares you away from giving credit for the cash:

P/B .8, P/E 9.2 so even if nothing ever happens with the cash, you get a double digit earnings yield to MV and downside protection from the balance sheet.

Company Overview

Willi-Food is a food distributor of Kosher products (that also has some branded products) with 80% of sales in Israel. Sales are primarily from dairy (26%), canned vegetables (18%), and edibles oils (10%).

The business is a good return on capital (15% ROA ex cash), niche, stable business with low capital requirements. It is a low-growth business but has good tailwinds selling Kosher foods which have had higher growth (15% estimated Kosher market growth) due to health-conscious buying.  The company has been able to grow around 5-10% in most years. 

Occasionally the company can have bad years (but remains solidly profitable) when the Isreal economy has a downturn or the company has margin pressure due to food/fuel inflation with price increases lagging behind COGS increases. This occurred in 2011 with protests about high dairy prices in Isreal caused WILC to drop its prices with the result of operating income dropping in half.  The company has grown quickly since then, recovering back most of the profit drop.

Gross margins are about 25% with operating margins of 8-9%, which are high considering the industry. The company grew sales by 17% and operating profit by 24% in 2013. The company has stated that it expects 2014 will have double digit revenue growth with slightly higher gross profit margins, helped by some new product introductions.

Management and Company History

Since it’s inception in 1994, G Willi-Food has been run by brothers Zwi (Chairman) and Joseph Willinger (President) who owned 58% of WILC through their investment vehicle Willi-Food Investments (WFI).

The biggest blight on capital allocation is when the company did a dilutive public offering of $19M in 2010 when the company already had excess cash.  The offering was supposed to be used for an imminent acquisition into the U.S. market that never occurred. The cash has been idle on the balance sheet ever since.  Executive compensation has not been outrageous.  Other than the 2010 offering, there have not been any actions that would be considered for entry on the dumbest capital allocation threads.  The company has made some successful small acquisitions (such as Gold Frost and Shamir salads), in the past but nothing too impactful (well maybe Gold Frost but that was from 2001).

At times the company looked as though it was about to become shareholder friendly but didn’t quite follow through. The company paid a small .15/sh dividend in 2005 but has not paid any dividends since. In 2011, the company bought back $2.9M of stock from a $5M authorization.  Because the company often trades at very cheap valuation, buybacks would obviously be the best use of the cash. But because of the already consolidated ownership and concerns about trading liquidity, buybacks/tenders were never considered on a large scale. A large tender would still make a lot more sense than a U.S. acquisition, but this probably won’t happen.

Emblaze Transaction

Emblaze is owned by Ukrainian Oligarch Alexander Granovsky. He is deeply religious with ties to the Chabad Jewish movement. He has a complicated pyramid ownership structure for his companies and has stated his primary focus is to make money to fund donations to the Chabad movement.

IDB Holdings is Israeli’s largest conglomerate, holding interests in Cellcom (Israel’s largest mobile operator), Clal Insurance (#2 insurance company), and Super-Sol (large supermarket chain and WILC’s largest customer).  It is currently coming out of bankruptcy. In November of 2013, the Willinger brothers teamed up with Granovsky and Nochi Danker (IDB’s Chairman) to try to obtain control of IBD. In November of 2013, WILC provided a convertible loan of $19M to IDB in this attempt. In December, the group lost its bid for IDB control to Moti Ben-Moshe and Eduardo Elsztain (Cresud Chariman) from Argentina and the convertible loan was repaid in January.

An interesting quote from Granovsky in August of 2013:

“We’re entering Israel to do business, even if I don’t win IDB, I’ll seek to invest in Israel. If we win the tender, through IDB we’ll make more investments. It’s impossible for us not to win IDB, but if God decides no, then we’ll find another investment in Israel.”

The first part of the last sentence is umm, a bit scary from the perspective of WILC investors, but he soon delivered on the final statement with the WFI transaction.

In March of 2014, Emblaze (Israel based but listed in London), agreed to purchase a majority share of WFI (listed in Isreal) from the Willinger brothers for $77M, thereby gaining majority control of WILC. The Willinger brother will no longer own the company, put will continue as managers for at least 3 years pending shareholder approval. At that time they would be around 60 years old and might be looking to retire.

Here are some of the bigger risks that pop out of this string of events:

  • Despite some capital allocation concerns, the Willinger brothers have been pretty good operators of the company so there is some risk that without them the company struggles and margins decline. Hopefully the 3 year agreement allows the company to remain focused and continue its positive business momentum.
  • Super-Sol is the company’s largest customer (19% of sales) and WILC management was friends with IDB’s Chairman. Now that Danker no longer runs IDB, there is a risk that terms of Super-Sol/WILC sales deteriorate, creating a large headwind for the business.
  • WILC is now controlled by an Ukranian Oligargach at the bottom of a large and complex investment pyramid. Information on the companies at the top of the pyramid is hard to come by.

Corporate Holding Structure

Alexander Granovsky – Controls Chabad 770

Chabad 770, Granovsky’s private foundation, based in Netherlands. “Profits are intended for charitable purposes and Jewish institutions worldwide”.” Controls ZBI.

ZBI, controls BGI

BGI, based and publicly traded in Israel (ticker BGI). Owns 44.1% of Emblaze, controls 58.56% of voting shares

Emblaze, based in Israel, publicly traded in London (ticker BLZ), $101M Market Cap. Formally ran tech companies now a cash shell. Chaired by a Rabbi. $59M in net corporate cash + WFI ownership + tiny tech business+ Corporate SGA. Owns and controls 62% of WFI.

WFI, publicly traded in Israel, $81M Market Cap. $17M in net corporate cash, owns 58% of WILC

WILC, publicly traded in US, $86M market cap. $62M in cash.

Plans for the acquired WILC stake are to focus on expanding operations internationally, with a focus on Europe. In the last conference call, the Willinger’s mentioned that several acquisition targets are being looked at. Talking about acquisitions and not going through with them has been a recurring theme with WILC. Now that Granovsky is in control of capital allocation, this could change.  

I view the governance/capital allocation risks as a concern, but am willing to go along with them at this price. I don’t expect any catalyst to occur from a buyout/deploying the excess cash into that fabled U.S. acquisition/special dividend, but they could occur, and at this price you are not paying for that upside. There does remain a risk that an overpriced acquisition occurs.

On the other hand, I am also making the bet that the cash will be blown on something stupid or that some type of fraud or self-dealing will hugely impact minority shareholders. I think Granovsky wants to make money, and that his incentives are roughly aligned with minority shareholders. I think he would like to grow WILC’s value/earnings and see more Kosher food sold around the world. I also think that international expansion is a good opportunity for WILC.  If Granovsky eventually wants to make money, he will eventually have to dividend the cash up through the corporate pyramid, at which point minority WILC shareholders will also be paid.

WILC’s corporate structure does prevent some abuse of minority shareholders through provisions that the audit committee, BOD, and shareholders vote on extraordinary transactions involving controlling shareholders:

Approval of the audit committee, board of directors and our shareholders, in that order, is required for:

  • extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; and
  • the terms of an engagement by the company, directly or indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder of the company, regarding his or her terms of employment.

The shareholder approval must include the majority of shares voted at the meeting. In addition, either:

  • the majority of the shares of the voting shareholders who have no personal interest in the transaction must vote in favor of the proposal (shares held by abstaining shareholders shall not be considered); or
  • the total shareholdings of those who have no personal interest in the transaction and who vote against the transaction must not represent more than 2% of the aggregate voting rights in the company

At the end of the day, the governance risk is the biggest issue with this company. At the current price I am willing to accept that risk. I assume that shares will have a nice gain here either through the market giving the company a more normalized multiple, or from the business’s improving financial results/cash accumulation.

1 year return valuation targets:

 $K

 Down

 Base

 Upside

 

 Emblaze Valuation

 Sales Growth

-5%

 Flat

5%

 Sales Growth

10%

 Op Margin

 6.5% (2011 Trough)

 Flat (8.7%)

9.0%

 Op Margin

9.0%

 Operating Income

                               5,978

           8,411

        9,149

 Operating Income

                               9,584

 Taxes

24%

24%

24%

 Taxes

24%

 NOPAT

                               4,543

           6,392

        6,953

 NOPAT

                               7,284

 Multiple

 5.00

              8.00

        12.00

 Multiple

                                 18.8

 EV

                             22,717

         51,139

     83,436

 Emblaze WFI Purchase

                             76,600

 Existing Net Cash

                             61,752

         61,752

     61,752

 % Ownership of WFI

58%

 Cash Build

                               6,500

           6,900

        1,000

 100% WFI MV Valuation

                          132,069

 Total Net Cash

                             68,252

         68,652

     62,752

 Less WFI Cash

                             17,000

 Cash Value

75%

90%

100%

 WFI EV Valuation

                          115,069

 Cash Valuation

                             51,189

         61,787

     62,752

 % Ownership of WILC

58%

 Market Value

                             73,906

       112,926

   146,188

 WILC Implied Market value

                          198,395

 Price Per Share

                                  5.70

              8.70

        11.27

 Price Per Share

                               15.29

 Gain

-12%

34%

73%

 Gain

135%

 Note: Market Value Valuations 1 year From Now

 

 P/E

                                  11.3

              12.3

          15.0

 P/E

                                 19.7

 P/B

                                  0.66

              0.99

          1.27

 P/B

                                 1.72

It is tough to come up with a scenario where you lose money here long term. Outside of some governance abuse/dumb acquisition, the company has very little downside. I estimated a 15% downside from here based on a small sales decline and a significant margin contraction. At that point the company would be trading at 2/3 of book value and have 90%+ of the company’s market cap covered by net cash.

I think a reasonable 1 year-ish target is up 35% back towards $9/share. This is where the company traded earlier in the year before the Emblaze transaction. There is a potentially much higher return (70%+) if the company gets a reasonable multiple and full value for its cash. 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

None really.
The company is at its 52 week low on the back of the Emblaze transaction. Q1 earnings release will be on 5/28.
Perhaps more color on the next call could give investors more comfort about the transaction or get them excited about a potential acquisition opportunity.
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