Description

Weetabix is a leading British consumer food/branded goods company which is trading on the Ofex exchange (www.ofex.com) at a valuation of 6.5 times enterprise value to net income. The stock has a dividend yield of 4.5%, a market capitalization of GBP 280 million, earnings after tax of GBP 35 million, and cash on the balance sheet of GBP 75 million with no debt.

The company generates a return on equity of around 15%, which rises to more than 20% if one nets out the cash on the balance sheet. Over the last 10 years, the company has grown earnings by 10% per year.


Business
Weetabix is the second largest breakfast cereal producer in the United Kingdom, the number one being Kelloggs, and the number 3 being Cereal Partners UK, a partnership between General Mills and Nestlé.

Weetabix owns a number of cereal brands which are well recognized in both the UK and in other Commonwealth countries. “Weetabix”, the company’s namesake was the number one cereal brand in the UK in the year 2000, taking the top spot from Kelloggs Cornflakes. In addition to being the most popular, the Weetabix brand holds a special place in people’s hearts and minds in the UK with associations to solid and unchanging values.

The company owns the Alpen (muesli cereal) and Redi-Brek (hot oatmeal) brands as well as a number of smaller brands.

Too good to be true?
There are reasons why these shares are cheap.

The company is controlled by the founding family – who control most of the voting shares. The company would probably still be a private business today, but some time ago, the company instituted an employee share ownership plan to help the company retain and attract the best people from the FMCG’s industry. As employees retired, or found other uses for the shares thus acquired, an over the counter market developed for the company’s non-voting shares. This is an extremely illiquid stock.

The cereal business is growing at slightly less than GDP growth in the UK. And consolidation of retailer power has meant that food manufacturers have been losing ground to the food distributors.

Sir Richard George is the CEO and the son of the founder. He is an extremely private man who almost never gives interviews or otherwise makes himself available to the public. The company similarly eschews contact with investors and other potentially distracting outsiders, thus making it difficult to learn more about the company.

Having said this, the company appears to be being run in the long term interests of the shareholders: Earnings have grown steadily, and the company has doubled the dividend over the last 5 years. Clearly, however, with no debt and GBP 75 million in cash, the company, like many family businesses is too conservatively financed. Sir Richard George has not succumbed to the temptation of diversifying which is heartening, although I suspect that the company is investing in two areas; new product launches, and geographical diversification.

While the company has succeeded commercially with a number of product extensions, for example from Weetabix to Fruitibix, Bananabix and Minibix, as well as extension of the Alpen Brand, it is not clear to me that these have been a financial success (the return on capital invested might have been better had it been sent to shareholders). This is the same concern that I have with potential expenditures on international expansion. Having said this, all the evidence points to a relatively parsimonious use of company funds within the business.

The George family has a significant stake in the non-voting shares, suggesting that they would be unlikely to do anything to disadvantage the non-voting shareholders.

Catalyst

There is no immediately visible catalyst for this investment. However, it is clear that if the company were ever to be sold, it would be for a multiple of 2-3 times the current price. So the current price does not reflect a catalyst. Sir Richard George is 67 years old, and his oldest son 16. The financial director is likely to retire in 2 years, as he comes up for retirement age.

Meanwhile, the value of the business continues to grow at 7-8% per year (by my estimation), and pays a significant and growing dividend.

Experience, á la Tweedy Browne, however, has shown that a portfolio full of these sorts of ideas tends to do well over time.