Description

Imperial Sugar is a post-bankruptcy play in the midst of an impressive turnaround. The company has only $41 million left in debt, and once its seasonal working capital needs peak this fall, it will have zero debt. What it will have is a much less volatile business than its historical past thanks to divestitures and $35 to $40 million in EBITDA on a market cap of just $90 million. Assigning a EBITDA multiple of 4 times an estimated $40 million in fiscal 2004 (ending Sept. 30), IPSU would trade at $17 a share including its $1 a share in NOL. One thing is for sure, with $15 to $20 million in FCF estimated next year; a 25% FCF yield is pretty damn good. Insiders agree they have bought over a half a million dollars worth of the stock in the last six months.

A Storied History Destroyed by Acquisition Fever

Imperial Sugar Company has been around since 1924 and is the successor to a cane sugar plantation and milling operation begun in Sugar Land, Texas in the early 1800s that began producing granulated sugar in 1843.

Yet it started on its path to bankruptcy in 1988 when it purchased Holly Sugar Corporation. Then in April 1996, it acquired Spreckels Sugar Company, followed by an acquisition of Savannah Foods & Industries, Inc. in December 1997 and then Wholesome Sweeteners L.L.C. in September 1998 and Diamond Crystal Specialty Foods, Inc. in November 1998.

By January 2001, saddled with too much debt, it could not stand a downturn in sugar prices, and Imperial entered into bankruptcy.

A long road from bankruptcy

On August 29, 2001, Imperial emerged from protection. It has taken two long years, but Imperial has sold off a number of its businesses and tried to sharpen its operational focus.

First, Imperial sold its foodservice business. And since the beginning of fiscal 2002, Imperial has really been aggressive. Imperial sold its disposable meal kit business in December 2001, then its Michigan Sugar Company subsidiary in February 2002, followed by its Worland, Wyoming sugar-beet factory in June 2002 and finally it’s Sidney, Montana, Torrington, Wyoming and Hereford, Texas sugar-beet facilities in October 2002. These sales (including the sale of the foodservice business), together with sales of surplus land and non-operating assets, have generated gross proceeds of approximately $251 million. Imperial also discontinued its raw cane sugar refinery operations in Sugar Land, Texas in December 2002.

Not surprisingly most of these sales and changes occurred under the watch of CEO Robert Peiser, who joined the company in April of 2002.

Imperial undertook this massive divestiture program to reduce its debt, to lower working capital needs, reduce its costs and to concentrate its resources in the most strategic regions of the Southeast, Southwest and the West Coast. In connection with the Michigan Sugar Company and Worland, Wyoming factory sales, we entered into multi-year agreements to market all refined sugar production from those facilities. (From 10-k)

Now a much less volatile business

The outcome is now a business that does not have working capital swings of north of $100 million. Now its working capital swing is more like $30 to $40 million. Now it is not saddled with loads of debt that could threaten to sink the company on any hint of a downturn.

By selling off those capital intensive facilities, Imperial is simply refining and selling the products that used to come out of its facilities, now operated by someone else. The company can grab a little margin with a much smaller requirement in capital expenditures and working capital. Essentially it can operate with much less risk.

Imperial has been getting out of the food service business and is trying to refocus its efforts on retail market. It has spent considerable time and effort focusing on new labels and packaging. Longer term the company is trying to bring out value added products that might improve margins and sales. The goal of the company is to create products that are more consumer friendly (read higher margin). Since, the company finally does not have to worry about its survival, it can instead try to grow revenues and expand margins.

The recent farm bill and government protection has made the domestic sugar market a much safer, stable market. Even though subsidies pervert market dynamics, you might as well invest in it and participate if the government is going to do something so stupid.

Clean balance sheet especially after seasonal effects

Imperial has $41 million in debt. But that is misleading as the company is very seasonal. Its 1st quarter (December quarter) is the company’s strongest quarter and when most of its cash comes in. Its fiscal 2nd quarter is its weakest, and then it builds working capital in the 3rd and 4th quarters. So, when you forecast out to December, with a conservative assumption of at least $40 million in inventory and A/R growth, Imperial will have no debt and will start building cash in December.

No analysts, no coverage, ridiculously low valuation

With a little over just 10 million shares and a very un-sexy business, it is not surprising that Imperial has no analysts to speak of. So, there is no one to chronicle its remarkable turnaround.

Clearly some investors are recognizing as the stock is up from its 52 week low of $1.05. But despite its remarkable rise, it is probably a safer and much easier investment now that the divestitures, charges and agonizing losses are over. And yet it still trades at 2 times EBITDA, and a 25% FCF yield.

Risks

Sugar Prices are not as volatile as you think, thanks to governmental protectionism. They vary maybe 5-6%. The problem is that sugar refining is a low margin business. So any decline in prices and there goes your profit.

Imperial hedges its natural gas exposure, however, continued strength in the commodity will continue to depress the companies margins long term.

With only 10 million shares, the company can be illiquid, trading an average of 28,000 shares a day. Though it can trade much more in volume, such as August 14th, after it announced earnings, Imperial traded north of 380,000 shares.

Outlook

Imperial, at the end of the year, should trade at least at 3.5 times my low estimate for EBITDA of $35 million that would give the company a price of $12 a share, which also happens to be the company’s tangible book value. However, the company also has $10 million in unused NOLs that adds another dollar to valuation to bring my price target to $13, or 44% higher just by year end.

In a year, the stock should trade to at least to 4 times EBITDA and should achieve $40 million in EBITDA. With an estimated cash build of $10 million, the company’s valuation should be $170 million, or about $17 a share, representing an 89% gain.

Catalyst

1) Increased Investor Awareness. The company just had its first conference call in three years on August 14th. It just went this past summer to visit with a few institutional shareholders for the first time. Word will spread and longer term analysts may pick up coverage for hope of financing business. By that time it won’t trade at a 25% FCF yield then.
2) 4th quarter earnings and conference. After yet another quarter of strong results, and getting even closer to zero debt, investors should be presented with even more evidence of the turnaround and will have to start wondering what the company will do with its excess cash flow next year.
3) Revenue growth in second half of 2004 due to introduction of new consumer products and returns from a stronger focus on value added products.