Description

Investment Summary

NOMD trades at 9.3x 2016E FCF versus packaged food peers at 23x. This peer set certainly differs from NOMD in terms of brand quality, secular growth and leverage but, even accounting for these factors, the valuation disparity is too large. A new management team has developed a credible plan to address these issues by stabilizing revenue growth; delevering the balance sheet, primarily through M&A rather than debt paydown; and extracting synergies from future acquisitions in an industry with a well-trodden path of accretive, low-risk deals. A variety of initiatives to stabilize the top-line will be rolled out in September-December of 2016; and their collective success will be a catalyst to share price growth over the next six months as a broader set of investors identifies NOMD as a successful turnaround.

Company Background

NOMD was formed through the acquisitions of Findus and Iglo groups by Stefan Descheemaeker and Paul Kenyon. Prior to founding NOMD, Stefan was president of Western Europe at Inbev, which is well known by investors for its prowess at cutting costs and generating M&A synergies. NOMD primarily produces frozen fish, including frozen fish sticks (39% of revenue), frozen vegetables (20%) and prepared meals (10%). This industry exhibits very little sales growth, as shown in the table below; for the last twelve months frozen fish grew by 1.5% in the average month, while veg was flat.

Industry Sales and NOMD Market Share – Western Europe

Sales Strategy

NOMD’s brands hold the #1 market share in their respective product categories across Europe as well as within all key countries, including the U.K., Germany, Italy, Sweden and France. The Company has lost share over the past year due to an ill-conceived strategy of the prior management team, which sought to consolidate brands and invest promotional dollars in new, innovative products. Unsurprisingly, using similar brands in widely-differing countries and sales channels in Europe was not successful; nor was introducing new, innovative frozen fish sticks to customers who value consistency.

Current management seeks to recapture lost share by decentralizing marketing decisions to best suit local preferences, and by focusing promotional dollars on core products. To date, this new strategy has been well-received by retailers. Initial promotions begin in late September and October with in the Autumn / back-to-school cabinet reset and come in full-force for the December holiday season. Promotions include some discounting, but also include non-monetary promotions. The pace of retailers’ restocking and the size of orders will determine whether these initiatives have been successful.

M&A Strategy

NOMD will use a substantial portion of cash flow to make acquisitions. For illustration, management’s ideal scenario would be a string of €60 million deals in European frozen food. In reality, deals will be lumpy and may take management beyond the core business. It’s highly likely that future deals remain in the frozen/prepared food space, but we may see an acquisition in North America. Management is focused on cost takeout, which will come from purchasing, consolidation of facilities with excess capacity and SG&A; as such, it’s likely that targets will have a high proportion of products that include frozen fish, meat and vegetables. On 9/13, it was reported that NOMD may be in the bidding process for Bellisio, an American company that makes frozen food for restaurants and retailers, including the Chili’s at Home line. Bellisio is reported to have had EBITDA of $48 million in 2003. The industry is fragmented, with a handful of 3-5% market share companies, so sourcing deals shouldn’t be a challenge.

Valuation

There is no perfect peer set for NOMD, but it’s helpful to compare it against global food companies, including those with frozen exposure and snack food companies. It’s somewhat useful to compare them against European grocery stores, although NOMD is not bearing the brunt of the competitive discounting at Tesco, Guichard, etc. and obviously is a different business model with a different ROIC profile. NOMD currently trades at 9.3x 2016E cash flow or 12.5x unlevered (I’m including their pension as debt in here). This compares with global food companies at 23x or 26x unlevered and European grocery stores at 15x levered and 18x unlevered. Clearly there is a discount for NOMD’s revenue growth but, keep in mind, organic growth at global food companies is 0-3% versus NOMD at negative low single digits this year and positive by 2017. If NOMD can stabilize its top line, it should at least trade at a mid to high teens unlevered cash flow yield, which would imply a stock price of $14-19 versus $11.44 today.

Risks

 ·     - Delay or failure of sales initiatives.

·      - Currency. There are significant sales in the U.K., some of which are produced in factories in continental Europe. Fish can be priced in Dollars, Euros or Scandinavian currencies. The stock dropped the day after Brexit for these reasons. The Company hedges purchases and can move production to partially mitigate exposure.

Additional Information

This posting is solely for the evaluation of club members and is not a recommendation to buy or sell this stock. The views expressed are those of the author individually and should not be attributed to any affiliated investment firm, which may or may not hold positions consistent with the views expressed herein and may buy or sell shares at any time.

Catalyst

Q3 and Q4 sales and promotional initiatives