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Crisis spells opportunity for this water seller
Like it or not, the crisis in Japan is going to spell opportunity for a whole host of companies. This bottled water firm is one of them. Paul Hill considers the case for buying-in.
Ever since the 9.0 magnitude earthquake hit the atomic power station in Fukushima, millions of Japanese people have rightly been worried about radiation poisoning. So far, a substantial yet unknown quantity of radioactive vapour has spewed into the atmosphere, capable of entering the food chain and polluting nearby countries too. In fact, this may have already happened because when it rains or snows, there's a good chance local reservoirs will become contaminated with nuclear material. No wonder families are emptying grocery stores of bottled water.
Worse still, if the situation deteriorates, then Japanese water brands which harvest their liquids from domestic springs/aquifers could soon see their sources contaminated too. So consumers will be faced with very few options except to buy water from overseas.
But that's going to boost the likes of Danone, the world's second-largest producer of packaged waters (15% of sales). It owns two of the five top-selling brands, Evian and Volvic, and is the number one importer into Japan, Taiwan and Thailand. Indeed, Danone could be in the right place at the right time supplying desperately needed drinks to the whole of the Pacific Rim.
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Additionally, last week's turbulence has caused this baby to be thrown out with the bathwater. The stock has dropped almost 10% since Christmas, which I believe could put it on the radar screen for industry giants such as as Nestl or Unilever.
And that's not all. The Danone group is also the global leader in fresh dairy foods (59% of revenues), the number two in baby nutrition (20%) and the European leader in medical nourishment (6%). It owns blockbuster brands such as Activia, Cow & Gate and Milupa. All four of these divisions are expanding in the mid-to-high single digits, thanks to their bias towards healthy living and emerging markets (50% of sales). At the same time they produce operating profit margins of between 13% to 20%, and generate positive free cashflow of €1.7bn annually.
With regard to the numbers, the City is predicting 2011 turnover and underlying earnings per share (EPS) of €19.3bn and €3.02 respectively, rising to €20.7bn and €3.34 in 2012. That puts the shares on skinny price/earnings (p/e) ratios of 14.8 and 13.4. They also yield 3%.
What's more, the balance sheet is secure, with net debt (€3.2bn) and a pension deficit (€0.25bn) equating to a comfortable 1.1 times earnings before interest, tax, depreciation and amortisation (EBITDA). This is way too cheap for a company positioned to prosper from rising incomes in developing nations and the West's obsession with health. I would rate the stock on a 2011 EBITA multiple of 13, which delivers an intrinsic worth of roughly €54 per share.
Sure, investors are afraid that Danone may be affected by down-trading to cheaper brands and rising commodity prices. UK investors also need to consider forex implications. There is a chance the nuclear fallout could impact its relatively small Asian dairy business.
All the same, with anticipated top-line growth of 6% to 8% in 2011 and great opportunities to import into Japan, these fears are more than factored into the price. Jefferies has a price target of €61.
Recommendation: BUY at €44.70
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
