Whereas on 27 October, management was still expecting a FY11 EBIT for ABC in the range of $ 17-19m, this expectation has been revised downwards to $ 10-12m this morning. By US law, alcoholic drinks have to be sold through wholesalers. This three-tiered (producer-wholesaler-retailer) distribution system results in a time-lag between shipments and order levels. Given the success of Daily’s ready-to-drink pouches, the wholesalers and retailers stepped up orders in 3Q11. Production couldn’t cope and this led to the allocation of order. The three tiered distribution system masked the seasonal softening of consumer demand. Moreover, prospective new customers who agreed on new listings, but could not be served due to product allocation, decided to postpone the listing to 2012. This led to a built up in stocks at the wholesalers and lower than expected orders in 4Q11. The prospects for 2012 remain very sound however.
Revised forecasts:
We are revising our EPS forecasts for 2011, 2012 and 2013 downwards by respectively 19%, 16% and 13%. Whereas previously we were counting on 20% sales growth (in $) for ABC in 4Q11, our new forecast is based on flat sales. Our 10% sales growth estimate for 2012 and 2013 remains unchanged. Our 4Q11 REBIT margin assumption for ABC has been revised downwards from +2.0% to -15.0%. Note that in 4Q10 the REBIT margin equalled -14.5%. The loss is due to the seasonal effect. Given the lack of visibility we’ve cut our REBIT margin assumption for ABC from 11.7% to 8.7% in 2012 and from 11.8% to 8.8% in 2013. This compares with 7.3% (new forecast) in 2011.
Conclusion:
We are lowering our target price from € 4.2 to € 3.8. The investment case remains intact however. ABC does not belong to the core business of the group and will be sold one day. We maintain our positive stance on the stock because the group has all the ingredients to become a successful brand builder in European organic food. The balance sheet is solid with net debt at only 0.9x EBITDA, making the group well positioned to explore acquisition opportunities. Wessanen Europe’s top line growth will also come from innovation, exports, product assortment expansion and rising brand awareness.