CFA Institute Research Challenge
hosted by
CFA Atlantic Canada
St. Francis Xavier University
CFA Institute Research Challenge
Rating
06 Jan 2014
High Liner Foods Inc.
HOLD
Target Price (CAD):
Price, 23 Dec ’13
Downside (%)
42.47
45.01
-5.64
Marketing and Processing of Frozen Seafood
For the purpose of this report, we have used FactSet for all internal financial
information on the company. FactSet reports all the financial information for High
Liner Foods Inc. (HLF) in CAD dollars, which is why our numbers differ from those of
the company. This removes the currency exchange effect.
Highlights
Forecast Summary
2009
KEY STATISTICS
52 Week High (CAD)
52 Week Low (CAD)
Previous close (CAD)
Market Cap (millions CAD)
Shares Outstanding (000’s)
Float (%)
EPS FY1 (31 Dec 13)
P/E Ratio FY1 (2013E)
49.80
29.51
46.03
702.50
15262.00
58.40%
1.67
19.08X
TSX Ticker: HLF
2010
2011
CAD (000's)
Revenues
627,186 584,715 668,589
EBITDA
44,248 47,088 54,557
Net Income
19,747 19,816 18,180
CAD Per Share
Net Income
1.07
1.22
1.19
Dividends
0.27
0.33
0.39
Solvency
Net Debt-to-EBITDA
1.80
2.00
6.60
2012 2013F
2014F
2015F
2016F
2017F
942,302
82,367
2,202
982,987
86,212
25,513
1,192,647
112,823
43,319
1,316,500
124,111
43,293
1,569,160
140,580
56,112
1,600,543
159,181
65,891
0.14
0.42
1.67
0.70
2.84
0.93
2.84
1.02
3.68
1.18
4.32
1.37
3.75
4.29
3.06
3.13
2.70
2.68
Source: HLF, Team Estimates
Sources: HLF, Team Estimates
15,000.00
60
14,000.00
50
13,000.00
40
Share Price Movement
30
10,000.00
8,000.00
10
2-Jan-09
11,000.00
9,000.00
20
0
12,000.00
7,000.00
2-Jan-10
2-Jan-11
2-Jan-12
6,000.00
2-Jan-13
HLF
S&P TSX
Source: Bloomberg
Valuation
Estimated Price
Weights
Target Price
DCF
Multipliers
$51.97
50%
$
42.47
$32.97
50%
Source: Team Estimates
 We issue a hold recommendation with a target price of $42.47
There is a -5.64% downside from the current price of $45.01 (as of 23 Dec 2013).
Our hold recommendation comes with a positive outlook. An increase in the price of
the stock of 40% during the past year accurately reflects the company’s valuation.
2014 will be an important year for HLF to demonstrate strong synergy realization.
 Strong dividend growth
HLF was just admitted into the S&P/TSX Canadian Dividend Aristocrats® Index as
a result of continuous strong dividends during the past five years. They recently
announced an increase in their dividend payment to 19¢ for the fourth quarter of
2013, up 1¢ from the previous quarter. We predict that higher earnings in the
following years will also lead to higher dividend payments.
 American Pride acquisitions to add modest earnings
On Oct. 1st, 2013, High Liner Foods announced the acquisition of American Pride
Foods for a total of $50MM. With revenues of $190 MM and EBITDA margins of
3-4%, this acquisition will add EBITDA of around $6MM. HLF, however, won’t
begin to integrate American Pride until later in 2014.
 Difficulties with synergy realization
HLF has experienced delays with the integration of Icelandic USA. Throughput
rates have posed a challenge with the closing of the plants in Danvers, MA and
Burin, NL. HLF has a sustainable business model to support its rapid growth both by
acquisitions as well as organic growth. The company’s growth is supported by its
strong cash position and its recently enhanced information systems allowing for
faster synergy implementation. Our hold recommendation suggests that we have to
wait and see how effectively the company integrates new acquisitions and how
strong the synergy realization will be.
 2013 results show weak US food service sales and decreasing private label sales
A sluggish US economic recovery has led to low sales in the food service sector.
Private label sales in both the US and Canada have decreased as a result of people
switching to branded products, which benefits HLF’s brand sales.
 Healthy financials: High FCF, good margins and reasonable leverage
We forecast a strong cash flow that can be used to decrease leverage. In 2013, HLF
has experienced lower raw material costs, which have helped to maintain desired
higher margins. This reduction in raw material costs has offset the decrease in sales
volume to help HLF report high levels of EBITDA in comparison to the previous
year.
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CFA Institute Research Challenge
06 Jan 2014
Industry Overview
Figure 1: Fish Consumption per capita (kg)
Fish Consumption per capita (kg)
Macroeconomic Analysis
The US and the Canadian economy are expanding, but still have a long way to go. The
US Federal Reserve has announced that it will start the tapering of its Quantitative
Easing (QE) by 2014, which proves the positive state of the US economy. According to
the Bank of Canada’s Deputy Governor John Murray, this strengthened economy should
more than compensate for the drag from higher interest rates. When explaining how the
tapering will influence the Canadian economy, he states, “stronger external demand,
coupled with downward pressure on our currency and support for commodity prices
from a global economic recovery, will provide the lift.”
CAGR: +0.3%
30
25.5
26.4
CAGR: +0.5%
25
17.2
20
18.2
15
10
5
0
OECD countries
Non-OECD countries
2011
US
2021
Source: OECD
Real GDP
Private Consumption
Inflation
Food Inflation
Figure 2: Meat Consumption per capita (kg)
2010
2.40%
1.90%
1.60%
0.80%
2011
1.80%
2.40%
3.20%
3.70%
2012
2.30%
1.80%
2.10%
2.50%
2013
2.00%
1.30%
1.90%
3.50% n.a.
2014
2.90%
2.40%
1.70%
Meat Consumption Per Capita (kg)
CAGR: 0.4%
80
64.9
HLF operates in the industry of processing and marketing prepared and packaged frozen
seafood. In the past few years, this industry has seen steady growth due to the
convenience, added health benefits, affordability and availability of their products. With
a recovering North American and European economy, demand for seafood is expected
to increase. HLF is the leader in both retail and food service sales in Canada and the
leader in the food service sector in the US. HLF also has the highest sales of private
label products in both the US and Canada.
67.9
CAGR: +1.0%
60
40
26.3
29
20
0
OECD countries
Non-OECD countries
2011
2021
Source: OECD
Figure 3: Factors affecting CAN foodservice
sales
Factors affecting CAN Foodservice sales
0% 10% 20% 30% 40% 50% 60% 70%
Rising Food costs
Rising Labour costs
Weak economy
Shortage of skilled labour
Rising gasoline prices
Decline in tourists
shortage of unskilled labour
bad weather
Weak customer demand
rising liquor costs
Sales taxes
No factors
Source: CRFA
66%
57%
43%
36%
30%
29%
28%
23%
23%
20%
18%
3%
Food Service Industry recovering from recession
The National Restaurant Association expects the food service sector to grow at a
nominal rate of 3.8% in 2014, compared to a realized 3% growth in 2013. For HLF,
however, 2013 has not been a positive year in the US food service sector. The reason
being that seafood is a luxury product and the positive numbers are attributable to fast
food chains and middle market restaurants that cannot afford to buy large amounts of
seafood. In Canada, on the other hand, since the economy continued to improve, the
food service sector has increased 2.6% in the same period. As the figures for the
economic recovery in the US continue to improve, we expect HLF to experience growth
in sales over the next coming years, in accordance with the increase of household
income.
Decrease in private labels sales
As the economy recovers, private label sales decrease, but these are offset by the
increase in branded sales. The inverse relationship between private label sales and
branded sales is apparent when we look at the first 3 quarters of 2013 for HLF. This is
positive for HLF as they have better margins in their branded products compared to the
private label sales.
Increasing fish costs pose potential risk
In 2013, HLF depended heavily on low raw material costs to increase adjusted EBITDA
during the year as sales volumes fell. As of late, the fishing industry has seen a steady
rise in the price of yearly produce.
Rising shrimp and Haddock prices
The price of haddock has skyrocketed recently, due to increased demand and low catch
rates from Russia and Norway. Increasing demand for consumers and already low
supply have contributed to a seven-year high in the price of haddock. Buyers are slowly
switching to alternatives, such as cod, to compensate for losses. The price of shrimp has
seen a 62% increase from its November price per pound, as a result of Early Mortality
Syndrome (EMS). The three largest suppliers of shrimp (China, Thailand and Vietnam)
have all been affected by EMS, which was first reported in China in 2009. After 2009, it
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CFA Institute Research Challenge
Figure 4: General growth of Fish
consumption
2008-2010
2018-2020
Kg/capit
35a
30
25
20
15
10
5
0
Figure 5: Shares of total US food expenditures
Shares of total US food expenditures
79.00
69.00
Percent
spread to Vietnam in 2010, to Malaysia in 2011 and to Thailand in 2012. Within
Thailand, it recently spread to the productive southern region. Losses due to EMS are
approximately US$ 1 billion per year. Scientists are still unable to discover a wayto stop
this disease. This rise in prices could be a potential concern for HLF in 2014, but with
great relationships with their suppliers, topped with a wide range of different fish that
they offer, they will be able to not only offset this increase in prices, but also take a
competitive lead.
Positive price momentum for cod
Representing about 25% of HLF’s sales, the price of cod has a major influence in their
margins and operations. During 2012 and 2013, cod prices have remained at record
lows because of the huge supply coming in from the Barents Sea. Buyers are switching
to cod from other species such as Haddock. This increase in demand will lead to higher
cod prices over the course of 2014 and 2015.
Source: OECD and FAO
59.00
49.00
39.00
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
29.00
Year
Food at home
06 Jan 2014
Food away from home
Source: OECD and FAO
Aquaculture supply stronger than ever
Aquaculture continues to boost overall fish supply; pushing quotations down from
earlier levels. Fish consumption per capita keeps growing with aquaculture as it begins
to overtake capture fisheries as the main source of supply for direct human
consumption. In terms of overall supply of fish, however, aquaculture may be on a
destructive path that poses a threat not only to wild fish stocks but also to the industry’s
own long-term potential. Farmed fish such as cod, salmon and pollock have to be fed by
large amounts of wild caught fish. Production of a single kilogram of these species
typically uses two to five kilograms of wild-caught fish processed into fish meat and
fish oil for feed (ESA). In 2007/08 The United Nations’ Food and Agriculture
Organization (FAO) projected that in order to maintain the current level of per capita
consumption, global aquaculture production will need to reach 80 million tons by 2030.
Global aquaculture production reached another all-time high in 2010, at 60 million tons
(excluding aquatic plants and non-food products), reaching 79 million tons if you
include aquatic plants and non-food products. HLF will have to balance their inventory
between farmed and wild caught fish in a way that offsets the price increase in one place
or another.
Figure 6: Rising world prices, with those of farmed fish increasing more than wild fish
Figure 7: World capture fisheries and
Aquaculture Production Production
Fish, trade
Aquaculture
Capture
USD/t
3500
3000
2500
2000
1500
1000
500
0
2000
2005
2010
2015
2020
Source: OECD and FAO
Source: FAO
Both young and aging populations put an emphasis on health and quality
Rising health concerns for aging populations are putting an emphasis on premium and
healthier products. Fish represents 10% of the protein consumed by Americans and is a
growing alternative for those looking to maintain a healthy lifestyle. It is estimated that
the average American fish intake will increase from 5 kg per year to 5.3kgby 2015. This
represents an opportunity for HLF to capitalize on the desire for quality, healthier foods
by both the aging and youth populations. HLF, with their goal of procuring all their
seafood from certified sustainable suppliers, is investing in partnerships with schools
that will educate the youth about healthy and sustainable seafood choices.
Business Overview
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CFA Institute Research Challenge
Figure 8: Species Procured 2012
Species Procured 2012
Other,
18.2%
Cod,
24.7%
Salmon,
8.1%
Alaskan
Pollock,
14.5%
Tilapia,
9.1%
Haddock
11.4%
Shrimp,
14.0%
06 Jan 2014
High Liner Foods Inc. (HLF) is the leading North American processor and marketer of
value-added frozen seafood. Established in 1891, HLF sells to the retail, club and food
service market segments under the leading High Liner Mirabel, FPI, Royal Sea brands
in Canada, and under High Liner, Fisher Boy, Sea Cuisine, FPI, Icelandic Seafood,
Viking and Mirabel in the US and Mexico. It is also the largest supplier of private label
value-added seafood products to North American food retailers and food service
distributors. Trading under the symbol HLF in the Toronto Stock Exchange, HLF’s
share price is up nearly 40% in the past year, selling at a current price of $45.01 (As of
Dec. 23rd, 2013). The following chart shows HLF’s corporate structure and all of its
divisions. The Icelandic USA acquisition in 2011 gave them significant assets in China,
Thailand and Iceland. These mostly include processing plants that will help HLF on
their mission to become the leading provider of frozen seafood in North America.
Source: HLF
High Liner Foods
Incorporated
(Incorporated in
Nova Scotia)
High Liner Foods
(USA), Incorporated
Sjovik
(Incorporated in
Iceland)
100%
Dalian Three Star
Seafood Co., Ltd
High Liner Foods
(Thailand) Co., Ltd
(Incorporated in
China)
98.2%
(Incorporated in
Thailand)
99.9988%
(Incorporated in
Delaware)
100%
Viking Seafoods LLC
(Incorporated in
Delaware)
100%
ISF (USA) LLC
(Incorporated in
Delaware)
100%
This well-established seafood distributor has maintained and enhanced their current
position through the years as a result of their dynamic growth strategy. HLF has been
growing through synergies with performance-enhancing acquisitions, which are
responsible for a large part of their growth. Organic growth is achieved by the addition
of new products to their product lines.
Figure 9: Canadian vs. US Sales in 2012
Canada vs. US Sales 2012
Canada,
33.2%
US,
66.8%
Source: HLF
High Liner Foods continues its strategy to grow through acquisitions. On Oct.1st,
2013, HLF announced the acquisition of American Pride Seafoods for a total of
$50MM, which will bring in revenues of around $190MM. The company has much
smaller margins than HLF with EBITDA margins of 3-4%. With this, American Pride
will bring in EBITDA of around $6MM prior to complete integration in 2015. The
integration will start once the synergies from the closure of the plant in Danvers, MA
and the acquisition of Icelandic, USA are fully realized.
Difficulties with plant rationalization due to the closing of Danvers, MA and Burin,
NL are expected to continue into 2014. These delays are a result of increased
operational costs associated with the integration of new products into their respective
production facilities and will defer the supply chain efficiencies of $20-25 that HLF was
expecting to complete by 2015 to later on in 2016. HLF, however, has improved their
supply chain by fully integrating customer service and order fulfillment functions across
the company to provide one system for ordering, invoicing, and delivering.
A strong management team with vast industry experience.
High Liner Foods has employed a premier management team of seven industry
professionals with years of experience in the seafood industry. Demone brings over 30
years of experience in the seafood industry and recently stepped down from handling
day-to-day operations to focus on the company’s vision and strategy. Taking over
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CFA Institute Research Challenge
06 Jan 2014
Demone’s duties as COO is Keith Decker, former COO/President of High Liner USA.
Decker has an outstanding track record in the company, leading the acquisitions of
Viking Seafoods and Icelandic USA. We believe that this new addition will give
Demone more time to focus on his vision and growth strategy and will allow Decker to
improve the company’s logistics and operations by focusing more on the integration of
American Pride and on day-to-day operations. CFO Kelly Nelson will be retiring after
30 years of leading the company through significant changes and expansion. He will
operate as CFO until an appropriate successor has been chosen, and there is no doubt
that HLF will find a great candidate. ALL FACTS NEED CITING
Product innovation does not cease. With an already vast product line, HLF continues
to innovate and introduce new products into the market place. HLF has recently
announced the Ultimate Salmon Burger™, under the High Liner’s FPI® brand portfolio.
With customer demand for healthier products on the rise, HLF responds with a
differentiated product that will have great success in the foodservice industry.
Strengths
 Superior branding, marketing,
quality control and service
 Economies of scale
 Strong purchasing power
Opportunities
 The global supply of seafood is
expanding, and consumer demand is
increasing due to the recognized
health benefits and taste of seafood
 Overseas expansions and
acquisitions
 Expanding its product lines
Weaknesses
 Difficulties
in
rationalization
supply
chain
Threats
 A sharp rise in oil and fish prices
 Changes in regulations
 Severe disease outbreaks
 Price Volatility
 Forex
Competitive Analysis
Competition varies between the different segments and geographical locations that HLF
operates in. In the Canadian frozen packaged seafood market, HLF held 42.6% of the
market share for the 52 weeks ended December 15, 2012; up 1.6% from the previous
year. HLF is also the lead provider of processed seafood for the Canadian foodservice
channel. The exact market share in the foodservice industry is harder to measure, which
is why there is no exact number. Within Canada, HLF competes with Toppits Quality
Frozen Foods, Export Packers Company Limited, Clearwater Seafoods Trident
Seafoods Corporation, and many other smaller companies. Within the United States,
HLF holds 2.3% of the total frozen seafood category and experiences very fierce
competition in the retail segment. Companies that compete directly with HLF in the US
include Clearwater Fine Foods Inc., Trident Seafoods Corporation, American Seafoods,
Nippon Suisan, Ocean Beauty, Aqua Star, Red Chamber, Beaver Street Fisheries Inc.,
Pacific Seafood Group and many other smaller private companies. Most of the
competing companies are vertically integrated, which differs from HLF’s strategy of
horizontal integration.
The pros and cons of a horizontal integration
Unlike most of its competitors, HLF is horizontally integrated. They buy their fish from
a number of suppliers from over 20 different countries, which gives them the flexibility
to offer an extensive line of products. HLF also has purchasing power strength thanks to
their high volumes and lower inventory risks. By not having their own fish farms or
fishing boats, they are able to skip around natural disasters or sudden price changes by
having the ability to switch suppliers with ease.
Reduced inventory risk:
Pros: HLF is in a better position to manage their inventory to meet current demand. A
company that farms and catches their own fish might have more trouble getting rid of
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06 Jan 2014
excess inventory. If they catch too much of one type of fish and all of a sudden demand
for that fish decreases, they will find themselves with leftover stocks. Having the ability
to purchase fish from different suppliers allows HLF to avoid the risk of sudden disease
outbursts, oil spills, nuclear plant leaks, etc. If a firm is vertically integrated, they are
constrained to the regions where their facilities are located
Delete this space
Cons: The purchasing price of prime materials will always be higher when buying from
a third party since every step of the way will have margin increases.
Costs and Prices
Pros: With such a big presence in the North American market, HLF is able to maintain
low raw material costs by bargaining with their suppliers.
Cons: Vertical integration allows for purchase price stability. Vertical chains are not
subject to sudden third party cost increases and are able to maintain relatively stable
prices. For HLF, however, since they are in the hands of their suppliers, sudden cost
increases would have to result in price increases or lower margins.
Figure 10: EPS and Growth
5.00
4.32
4.50
CAGR:
20.94%
4.00
3.50
EPS
3.00
2.50
2.00
1.67
1.50
1.00
0.50
0.00
Financial Analysis
New acquisitions, improvements in the supply chain and logistics, and a recovering
economy will help boost revenues in the coming years. In 2013, HLF experienced a
decrease in sales volume due mainly to weak US foodservice sales and an overall
decrease in private label sales. This decrease in sales, however, has been offset by a
decrease in raw material costs, an increase in branded product sales, and synergies
realized from both the closure of the plant in Danvers, MA and the Icelandic USA
acquisition. The recent acquisition of American Pride and efforts to improve supply
chain and logistics will improve their efficiency and boost revenues by $239 million, or
24.3% in 2014.
Year
Source: Company and Team Estimates
Figure 11: EBITDA
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
In 2013, HLF revealed a rise in net income. Prior to the acquisition of American Pride,
this increase was driven by the consolidation and synergies arising from the closure of
the Danvers, MA plant and from lower financing costs. HLF’s sales volume, however,
decreased during the year due to weak market conditions in the US: lower food
consumption and decreased demand in the foodservice sector. HLF reported strong
Canadian sales in both the retail and foodservice sector, but not enough to offset the
decrease in foodservice and private label sales in the US market. A strong performance
coupled with the dividend announcement and the news of the American Pride
acquisition were the main growth drivers of the share price.
In 2012, HLF reported a decrease in sales volume by 4.8% excluding the Icelandic USA
acquisition. Their goal of increasing sales by 5% YOY was only met if the Icelandic
USA acquisition is included, and will only be met in 2013 if the American Pride
acquisition is included. Once the sluggish economic recovery improves in the US, HLF
will benefit from organic growth and their sales volume will start to increase once
again.
Source: HLF and Team Estimates
Figure 12: Sales (000’s)
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Source: Company and Team Estimates
HLF to face pressures on gross margins from acquisitions: We estimate that HLF’s
gross margin for 2013 will be 22.34%, an increase of 0.8% from last year. We expect
margins to decrease a small amount in the 2014 because of American Pride’s lower
margins, but they will adjust to normal levels once the integration is complete. Gross
margins will also be reduced as the company grows and benefits from economies of
scale, but not by a noticeable difference, since fixed costs will continue to increase with
the addition of new plants. HLF is able to mitigate changes to their gross margins
because of their strong purchasing power, through price changes, species substitution
and product formulation changes. Margins are also improved by investments into
enhanced enterprise planning software.
New acquisition needed to reach goal of $150 million Adjusted EBITDA
Our forecasts include a new acquisition during 2015. In 2014, we expect HLF to focus
more on the integration of American Pride as well as fully realizing all synergies from
the closure of the plant in Danvers, MA. For our predictions, we assume the acquisition
is priced at $60 million and will bring in revenues of $200,000 per year. There is no
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official information regarding the size and magnitude of the acquisition, so we assume
that it will be approximately the size of American Pride. In order to maintain a Net
Debt-to-EBITDA ratio of 2.50-4.00x, we will finance this acquisition mainly through
debt. With the tapering of QE, we will see interests rates rise in the short term but with
strong FCF, HLF will be able to refinance their loans when needed. The uncertainty of
this acquisition supports our hold recommendation and we will have to see what the
company announces in the near future to decide if the acquisition will add value to the
company or not. Based on past acquisitions, we can deduce that the target company will
be well thought out and will adapt to HLF’s vision and growth strategy.
Realization of synergies to be delayed
HLF intends to delay the integration of American Pride until 2014, thus delaying the
realization of synergies until later in 2015. We expect EBITDA margins for American
Pride in 2014 to be 3-4%; much lower than HLF’s 2012 margins of 8.7%, due to higher
competition in the foodservice sector. Because of their size and magnitude, HLF is able
to respond to high competition by offering better prices and building stronger
relationships with their customers.
Figure 13: Dividend Payments
Dividend Payments
2013A
$
0.70
2014F
$
0.93
2015F
$
1.02
2016F
$
1.18
2017F
$
1.37
Marc Robinson, an analyst at Cormark Securities Inc., believes that HLF will close the
plant in Malden once the lease expires in 2015. His argument that the newly acquired
plant in Bedford will be able to handle some of the existing Malden production, is solid
and we have estimated this in our projections. In 2015, aside from the new acquisition
that we have predicted, HLF will experience restructuring one-off costs because of the
closure of the Malden plant as a result of lower throughput rates. Ultimately, this
closure will reduce personnel and rent expenses and will result in synergies of $10MM
pro-forma EBITDA. Because this is the only plant that HLF leases, they won’t receive
anything other than the mentioned synergies.
Source: HLF, Team Estimates
Figure 14: Capital Structure
Capital Sturcture
1,000,000
800,000
600,000
400,000
200,000
-
net-interest bearing debt
Shareholder's Equity
Source: HLF, Team Estimates
Figure 15: Shareholder Structure (2013)
42%
58%
Higher earnings will lead to higher dividends.
Our projections indicate payments of yearly dividends of 93¢, $1.02, $1.18 and $1.37 in
2014, 2015, 2016 and 2017, respectively. HLF has recently announced that they will be
added to the S&P/TSX Canadian Dividend Aristocrats® Index, which comes as a result
of creating value to their shareholders. “Criteria for addition to this index include the
firm has increased ordinary cash dividends every year for five years and can maintain
the same dividend for a maximum of two consecutive years within that five year period”
(CNW).
Capital Structure
We predict the net interest-bearing debt to total capitalization ratio for the year ending
in 2013 to be 52%. With strong cash flow from operations, the company is expecting to
decrease this ratio by paying off outstanding loans. In 2015, however, we see an
increase in this ratio with respect to 2014 due to the acquisition. We predict that the
company will reduce this ratio to 50% by the end of 2017. The company has announced
the desire to maintain the Net-Debt to Adjusted EBITDA ratio at 3x. We have reduced
the non-adjusted ratio to 2.68x in 2017 since the company will be at an unsaturated level
and will be able to pay off outstanding loans with their excellent FCF. Interest rates will
also rise as a result of the tapering of the QE and paying off outstanding loans will allow
HLF to reduce their interest expense.
We have assumed the same level of shares outstanding, which is subject to change.
There lies the possibility that HLF will choose to repurchase shares at a later date to
increase shareholder value. We didn’t make any assumptions regarding this, since there
is not enough information.
Valuation
Float (%)
Source: HLF
Insider/Stake Ownership (%)
Discounted Cash Flow
We assigned a growth rate of 2.00% and we used the WACC calculated in 2014 of
7.52% (see Appendix 5). After finding Cash Flow From Assets (CFFA), we found the
PV at year 2017 (year of stable growth) and discounted all of the previous cash flows
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06 Jan 2014
until the present year (2014). The following table shows our calculations for the cash
flow from assets (CFFA), which we later use to find the intrinsic value of the company.
Figure 16: Cash Flow From Assets (CFFA)
in 000's of CAN dollars
OCF
2008
EBIT
DA
TAXES
NCS
Ending fixed assets
Beginning fixed assets
DA
∆NWC
Ending WC
Beg. WC
OCF=EBIT+DA-TAXES
NCS=Ending fixed assets-beg+dep
2009
2010
2011
2012
2013F
2014F
2015F
2016F
2017F
30,272
35,200
38,731
44,823
62,993
69,982
93,347
102,687
118,942
137,327
8,311
9,048
8,357
9,734
19,374
16,230
19,476
21,424
21,638
21,855
4,045
8,398
12,778
9,332
(1,666)
14,944
21,288
21,275
27,575
32,380
59,016
57,520
8,311
59,528
59,016
9,048
58,829
59,528
8,357
99,933
58,829
9,734
88,884
99,933
19,374
113,419
88,884
16,230
136,103
113,419
19,476
162,900
136,103
21,424
180,819
162,900
21,638
198,901
180,819
21,855
104,685
78,287
34,538
105,113
104,685
35,850
74,694
105,113
34,310
120,834
74,694
45,225
109,773
120,834
84,034
107,209
109,773
71,268
102,913
107,209
91,535
120,279
102,913
102,836
129,939
120,279
113,006
146,135
129,939
126,801
9,807
9,560
7,658
50,838
8,325
40,765
42,160
48,222
39,557
39,936
NWC=ending WC-beg. WC
26,398
428
(30,419)
46,140
(11,061)
(2,564)
(4,296)
17,366
9,660
16,195
CFFA=OCF-NCS-∆NWC
Source: HLF and Team Estimates
(1,667)
57,071
(51,753)
86,769
33,067
53,671
37,248
63,788
70,669
DCF Calculation
Figure 17: Terminal Value
Assumptions
Calculating Target Price (000's)
Terminal Value Assumptions
Growth rate
WACC (2014)
2%
7.52%
Source: HLF, Team Estimates
1.00%
$57.43
$52.90
$48.83
$45.16
$41.62
$38.80
$36.02
$33.47
$31.12
1.15%
$ 65.00
$ 59.59
$ 54.78
$ 50.48
$ 46.37
$ 43.11
$ 39.93
$ 37.03
$ 34.37
$
$
$
$
$
$
$
$
$
Source: HLF, Team Estimates
2.00%
74.34
67.74
61.94
56.82
51.97
48.17
44.48
41.15
38.11
2.50%
$ 86.14
$ 77.87
$ 70.74
$ 64.51
$ 58.69
$ 54.18
$ 49.85
$ 45.96
$ 42.45
EV (Enterprise Value)= CF2014/(1+r) 1 +CF2015 /(1+r) 2 +CF2016 /(1+r) 3 +CF2017/(1+r) 4 +CF2017 (1+g)/(r-g)
EV= $
Equity= EV-(ST + LT Debt-Cash & ST Investments)
= $
=
Target Price= Equity/Common Shares Outstanding
= $
Figure 18: Sensitivity Analysis
DCF Sensitivity Analysis (WACC- Left; Growth Rate- Top)
6.30%
6.60%
6.90%
7.20%
7.52%
7.80%
8.10%
8.40%
8.70%
25,862
3.00%
$101.51
$ 90.82
$ 81.78
$ 74.03
$ 66.90
$ 61.45
$ 56.27
$ 51.66
$ 47.55
1,163,422.64
793,210.94
51.97
With an Enterprise Value of $1,163MM, the company should be trading at 13.49x
EBITDA (2013). This is a 7.3% increase from the actual value of 12.50x. At this EV,
HLF is trading well above the actual average, and well above the next twelve-month
(NTM) average. In the past 52 weeks, HLF’s share price has risen around 40%; 3%
above the industry average. This comes as a result of the American Pride acquisition,
good pricing and lower costs; something that HLF has taken full advantage of. A
change in the growth rate and/or the WACC could alter the results as shown in Figure
18, which is why we cannot rely only on our DCF model.
Multiples Analysis and Price Relatives
For our multiple analyses we used the P/E and EV/EBITDA ratios with a competition
set of 10 firms that operate in the seafood industry as well as the frozen food industry
(See Appendix 4).
Multipliers Pricing
P/E Peers Median
EPS
2014E
12.60
1.67
Price from P/E Ratio
Weights for years
Average Price
Weight for Multipliers
Price from Relative Valuation $
21.04
50%
33.81
50%
32.97
2015E
12.10 EV/EBITDA Peers Average
3.85 EBITDA (000's)
Cash+ST Investments
Debt
Equity
Shares outstanding (000's)
46.59 Price from EV/EBITDA
50%
2014E
7.40x
112,823
10,787
356,429
467,674
15,262
30.64
50%
32.13
50%
2015E
6.69x
124,111
8,287
397,165
512,969
15,262
33.61
50%
Price Relatives
After choosing an appropriate peer group, we conducted multipliers pricing based on
2014E and 2015E values. The values that are shown in Appendix 8 were derived from
FactSet, which calculates expected values based on professional analyst reports of every
company. We predict HLF to have a P/E ratio of 15.86x for 2014, compared to an
8
CFA Institute Research Challenge
Figure 19: P/BV vs. ROE
P/BV vs ROE
6.00
Clearwater
06 Jan 2014
industry median of 12.60x. This tells us that HLF is overvalued relative to its peers,
which includes mostly seafood companies, but which also includes firms that sell valueadded frozen food. We arrived at a price of $32.97 by assigning a weight of 50% to the
P/E ratio values for 2014 and 2015 and a price of 50% to the EV/EBITA ratio of 2014
and 2015. This price is 36.5% lower than the current trading price, which could suggest
that the median reflects an industry still affected by the economic recession, which is
more severe in some countries where firms in our competition set operate in.
5.00
High
Liner
4.00
P/BV
The chart in Figure 19 further supports our finding that the stock is slightly overvalued.
As ROE is increasing, the P/BV does so as well. Compared to other firms, HLF is less
capital intensive since it is not vertically integrated, which is reflected in the higher
P/BV. A higher value compared to its competitors for the same level of ROE is
therefore acceptable in this situation.
3.00
Premium
Brands
Pinnacle
Tyson
Maple
Leaf
2.00
Hillshire
Brands
Nippon
Suisan
1.00
0.00
-10.00
0.00
Source: FactSet
10.00
ROE
20.00
30.00
Valuation summary
HLF’s share price already reflects American Pride Acquisition
Since the acquisition announcement early in 2013, the share price has increased by
nearly 40%. This upside indicates that the market price takes the acquisition into
consideration. Looking at the acquisition from a long-term perspective, we deduce that
it adds moderate earnings, has a lower EBITDA margin compared to HLF, synergies
are expected to be realized more than a year from now, and was purchased at around
8.8x EBITDA. This, along with a recovering economy and a small amount of organic
growth, proves that this increase of 40% is an adequate adjustment to the share price.
Recurring earnings coupled with good margins leads to a stable cash flow
Our projections show growing earnings as a result of increasing revenues as well as
synergies realized from acquisitions. In the future, the company will be well stabilized
and will have different options to invest their free cash in. They can raise the dividend
payments, invest in further acquisitions or conduct a share-repurchasing plan. Due to the
uncertainty of these events, we have assumed that the company will pay down their debt
with the extra cash flow. This supports our hold recommendation, indicating that the
company is well established and prepared in the case of an economic downturn, but can
benefit from an economic upturn if their cash is invested wisely.
Low price from relative valuation compared to intrinsic value
Based on the price from relative valuation of $32.28, the market assumes that this stock
is extremely overvalued at a price of $45.01 (23 Dec 13). One explanation for this is
that HLF’s EBIT vs. EBITDA multiples don not vary as much as that of its competitors
because of the lower depreciation expense that comes as a result of being horizontally
integrated. Most of its competitors, being vertically integrated, incur higher depreciation
costs because they need much higher capital expenditures to support their farming and
fishing activities. It is nonetheless a valuation that is worth looking at. In our final
calculation of the target price, we assign both types of valuations a weight of 50%.
Because HLF is a fast growing company and is currently undergoing a capital
restructure, it is not advised for the DCF valuation to carry more weight.
Investment Risks
Operational Risks
Fish and Commodity Price Volatility
Oil, flour and corn are important commodities for HLF and their prices have big effects
on the firm’s bottom line. With increased processing in Asia, HLF is incurring higher
oil costs due to the transportation of raw materials to North America. Flour and corn
play big roles in the processing and added value of HLF’s products. The cost of fish has
a big effect on their bottom line as well but HLF is able to mitigate these costs through
contracts with their suppliers.
Customer and Supplier consolidation
If HLF’s customers and suppliers start to consolidate, HLF would have less purchasing
power over their suppliers and be subject to higher purchasing power from the buyer’s
side. This could influence HLF’s margins negatively. Due to their high purchasing
9
CFA Institute Research Challenge
06 Jan 2014
volumes, however, they can negotiate their way into favorable prices relative to its
competitors.
Market Risk
Economic Volatility
Being a consumer good makes HLF a more defensive stock, but one that is affected by
economic volatility nonetheless. HLF is able to alleviate this risk by operating in
different sectors (foodservice, club and retail) that work inversely to each other. When
the economy is in a positive state, the foodservice sector has more of an advantage. In
contrast, in a negative economy, grocery stores have the advantage. Seafood, however,
is more volatile than other consumer goods because of its high price, which makes it a
bit more susceptible when economic conditions change.
Potential rise in interest rates
With the tapering of the QE, interest rates are more than likely to start going up. HLF
finances their acquisitions mainly through debt and is in the midst of refinancing some
of their loans. A rise in interest rates would mean higher financial costs. With a great
credit history, HLF is most likely going to be able to obtain relatively favorable interest
rates when obtaining future debt financing.
Figure 20: Global trends in the state of world
marine fish stocks since 1984
Source: FAO
Figure 21: 10 Year CAD to USD Exchange
Rate
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Political Risk:
Food Safety
Food safety is a top priority at HLF. As regulations become stricter, the costs of meeting
these regulatory requirements increase. HLF has an impeccable reputation and has its
own quality and health standards above those of imposed regulations. HLF is committed
to source all their seafood from certified or responsible fisheries and aquaculture farms.
Environmental Risk
Overfishing
Overfishing has started to become a concern as it decreases the population of fish in
certain areas. According to the FAO, a total of almost 80% of the world's fisheries are
fully- to over-exploited, depleted, or in a state of collapse. This could mean imposed
quotas, which would mean an increase in fish prices.
Oil spills and nuclear leaks
These risks pose a threat to the marine environment by killing millions of fish every
year. HLF, being horizontally integrated, can mitigate these risks by obtaining their raw
materials from different suppliers around the world. The risk can’t be fully mitigated
since prices might increase as a result of a shortage in supply.
Health risks
Disease outbreaks
Today, with globalization, disease outbreaks could potentially lead consumers away
from fish and into alternative sources of protein. This could also work positively with
potential cow or pork diseases, leading people to consume more seafood.
Economic Risk
Foreign exchange rates
Since 2012, HLF reports all their results in US dollars to reduce the volatility of changes
in the CAD/USD exchange rates. Domestic and foreign currency rates have an influence
on input prices. A strong Canadian dollar would result in input cost reduction and the
possibility of a drop in selling prices due to increased competition and the opposite
would occur with a weak Canadian dollar. HLF minimizes foreign exchange risk by
using various derivative products in accordance with an internal policy on managing
derivative usage and risk.
Source: Statistics Canada
Options going forward
If we consider the quotas for fish in the near future as a great risk, one option HLF
could contemplate is the possibility of acquiring fish farms, which would guarantee part
of their seafood supply and allow them to become partially vertically integrated. As an
example, due to the collapse of Spain’s stock exchange quoted Pescanova Group, its
Chilean assets are for sale. This division is currently valued at €80 million, based on
10
CFA Institute Research Challenge
06 Jan 2014
their outstanding debt with local Chilean banks. According to market rumors, the
administrator is willing to sell this asset for €80 million, which would equate to an
EV/EBITDA of 4x. In terms of size and positioning in the value chain it’s an interesting
acquisition that is worth taking a look at.
Appendix 1: Income Statement
Income Statement (Stfx '000s)
Sales/Revenue
Sales Growth (%)
Cost of Goods Sold (COGS) incl. D&A
COGS excluding D&A
2008
2009
2010
2011
2012
615,993
627,186
584,715
668,589
942,302
2014E
2015E
2016E
2017E
982,987 1,192,647
2013E
1,316,500
1,569,160
1,600,543
#VALUE!
1.82%
-6.77%
14.34%
40.94%
4.32%
21.33%
10.38%
19.19%
2.00%
484,622
495,888
447,331
520,267
739,317
762,377
942,191
1,029,503
1,211,391
1,219,614
476,311
486,840
438,974
510,533
719,942
746,147
922,715
1,008,079
1,189,753
1,197,759
Gross Income
131,371
131,298
137,384
148,322
202,985
219,610
250,456
286,997
357,768
380,929
SG&A Expense
100,697
96,098
98,653
103,499
139,992
149,628
157,109
184,310
238,826
243,603
Other Operating Expense
402.00
0.00
0.00
0.00
-0.00
0.00
0.00
0.00
0.00
0.00
EBIT (Operating Income)
30,272
35,200
38,731
44,823
62,993
69,982
93,347
102,687
118,942
137,327
EBIT Growth (%)
151.16
16.28
10.03
15.73
40.54
11.09
35.49
37.09
24.25
11.00
EBIT Margin (%)
4.91
5.61
6.62
6.70
6.69
0
0.0783
0.0780
0.0758
0.0858
9,048
44,248
7.06%
8,357
47,088
8.05%
9,734
54,557
8.16%
19,374
82,367
8.74%
16,230
86,212
EBITDA Margin
8,311
38,583
6.26%
19,476
112,823
9.46%
21,424
124,111
9.43%
21,638
140,580
8.96%
21,855
159,181
9.95%
Nonoperating Income (Expense) - Net
-609.00
-228.00
-25.00
-302.00
-454.84
0.00
0.00
0.00
0.00
0.00
6,463
5,445
5,237
5,681
24,609
20,898
19,853
22,122
22,458
27,538
Depreciation & Amortization
EBITDA
Interest Expense
Unusual expense
EBT
4,963
1,382
875
11,275
37,197
8,713
8,887
15,997
12,798
11,518
18,237
28,145
32,594
27,565
732
40,371
64,606
64,568
83,687
98,271
4,045
8,398
12,778
9,332
-1,666
14,944
21,288
21,275
27,575
32,380
22.18
29.84
39.20
33.85
-227.73
32.95
32.95
32.95
32.95
32.95
0.00
0.00
0.00
-53.00
-195.93
85.72
0.00
0.00
0.00
0.00
14,192
19,747
19,816
18,180
2,202
25,513
43,319
43,293
56,112
65,891
Income Taxes
Tax Rate (%)
Equity in Earnings of Affiliates
Net Income
0
Source: Company and Team Estimates
Appendix 2: Statement of Cash Flow
Statement of Cash Flow (000's)
Dec '08
Dec '09
Dec '10
Dec '11
Dec '12 Dec '13F
Dec '14F
Dec '15F
Dec '16F
Dec '17F
14,192.00
19,747.00
19,816.00
18,180.00
2,202.23
8,311.00
9,048.00
8,357.00
9,734.00
19,374.23
25,512.59
43,318.54
43,292.70
56,112.13
65,890.55
16,230.22
19,476.26
21,423.89
21,638.13
319.00
-5,587.00
4,166.00
800.00
21,854.51
32,169.76
624.35
624.35
624.35
624.35
23,865.00
29,058.00
38,737.00
28,714.00
624.35
53,746.22
42,367.16
63,419.15
65,340.94
78,374.61
88,369.41
Operating Activities
Net Income / Starting Line
Depreciation, Depletion & Amortization
Other Funds
Funds from Operations
Changes in Working Capital
Net Operating Cash Flow
3,464.00
-4,471.00
11,631.00
-25,142.00
25,210.19
2,563.68
4,295.95
-17,366.08
-9,660.07
-16,195.22
27,329.00
24,587.00
50,368.00
3,572.00
78,956.42
44,930.83
67,715.10
47,974.86
68,714.53
72,174.19
-4,671.00
-12,153.00
-4,413.00
-6,952.00
-12,704.56
-24,534.78
-22,684.42
-8,039.28
-17,919.04
-18,081.94
-235.00
0.00
-31,802.00
-257,778.00
0.00
-42,000.00
0.00
-60,000.00
0.00
2,000.00
25.00
34.00
143.00
231.92
46.00
0.00
0.00
8,712.00
-110.00
-391.00
-382.00
-246.91
0.00
0.00
0.00
0.00
0.00
5,806.00 -12,238.00 -36,572.00 -264,969.00
-12,719.56
-66,488.78 -22,684.42 -68,039.28
-17,919.04
-18,044.46
Investing Activities
Capital Expenditures
Net Assets from Acquisitions
Sale of Fixed Assets & Businesses
Other Funds
Net Investing Cash Flow
0.00
37.48
Financing Activities
Cash Dividends Paid
-4,184.00
-4,959.00
-5,238.00
-5,891.00
-6,376.77
-10,637.27
-23,336.67
-25,671.74
-29,735.57
-41,197.97
Common Dividends
-3,244.00
-4,959.00
-5,238.00
-5,891.00
-6,376.77
-10,637.27
-23,336.67
-25,671.74
-29,735.57
-41,197.97
-940.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
268.00
-978.00
-25,598.00
-978.00
152.95
0.00
0.00
0.00
0.00
0.00
-29,773.00
-11,081.00
-4,649.00
207,583.00
-2,882.99
66,003.24
-18,746.10
43,236.17
-8,935.95
46,207.62
0.00
0.00
20,724.00
63,209.00
-59,652.16
-29,765.02
2,862.58
0.00
2,836.03
-14,139.38
-33,689.00 -17,018.00 -14,761.00
263,923.00
-68,758.98
25,600.95 -39,220.19
17,564.43
-35,835.49
-9,129.73
14,960.00
45,000.00
Preferred Dividends
Change in Capital Stock
Issuance/Reduction of Debt, Net
Other Funds
Net Financing Cash Flow
Exchange Rate Effect
Miscellaneous Funds
Net Change in Cash
522.00
-410.00
-182.00
136.00
24.99
0.00
0.00
0.00
0.00
0.00
-32.00
-5,079.00
-1,147.00
2,662.00
-2,497.13
Source: Company and Team Estimates
11
0.00
-0.00
0.00
4,043.00
5,810.50
-2,500.00
CFA Institute Research Challenge
06 Jan 2014
Appendix 3: Balance Sheet
Balance Sheet ( '000s)
2011
2010
2009
2008
2012
2013E
2016E
2015E
2014E
2017E
CURRENT ASSETS
Cash & ST Investments
7,032
1,953
806
4,606
595
4,976
10,787
8,287
23,247
68,247
Cash Only
7,032
--
--
3,260
65
4,108
9,918
7,418
22,378
67,378
-
--
--
1,346
531
869
869
869
869
869
63,918
60,841
51,239
88,477
79,991
80,957
80,957
85,005
85,005
85,005
256,087
Total Short Term Investments
Short-Term Receivables
146,863
119,586
133,670
261,330
221,357
226,087
221,565
241,993
251,066
Other Current Assets
3,315
5,870
4,279
3,019
7,776
3,909
3,909
3,909
3,909
3,909
Total Current Assets
221,128
188,250
189,994
357,432
309,719
316,798
317,218
347,481
363,226
413,248
Net Property, Plant & Equipment
59,016
59,528
58,829
99,933
88,884
113,419
136,103
162,900
180,819
198,901
Total Investments and Advances
-
-
-
275
96
Long-Term Note Receivable
133
243
295
1,210
54,832
48,486
64,209
833
349
3,477
7,391
339,419
ST Debt & Curr. Portion LT Debt
Accounts Payable
Inventories
FIXED ASSETS
-
-
-
-
-
1,839
1,839
1,839
1,839
1,839
1,839
229,896
220,763
279,939
279,939
286,809
297,302
297,302
1,695
7,176
6,451
6,451
6,451
6,451
6,451
3,065
94
92
92
94
56
57
63
304,247
316,392
690,535
628,568
718,538
741,644
805,537
849,696
917,805
40,389
28,232
47,821
124,587
94,572
99,600
94,620
102,620
105,699
137,408
73,434
40,123
46,039
86,286
77,409
85,150
97,922
102,818
105,825
107,942
2,443
29
3,230
1,990
1,160
3,076
-
-
-
-
Other Current Liabilities
177
14,753
18,210
23,735
26,806
21,763
21,763
21,763
21,763
21,763
Total Current Liabilities
116,443
83,137
115,300
236,598
199,947
209,589
214,305
227,201
233,287
267,113
64,452
53,548
47,164
240,037
214,613
275,588
261,809
294,545
297,490
356,988
Provision for Risks & Charges
563
4,540
842
11,274
13,732
13,732
13,732
13,732
13,732
13,732
Deferred Tax Liabilities
-
4,688
8,872
41,099
44,932
43,015
55,293
55,038
55,038
21,430
Other Liabilities
2,112
1,254
673
-
2,651
9,044
8,953
9,849
18,600
2,300
Total Liabilities
183,570
147,167
172,851
529,008
475,874
550,968
554,092
600,364
618,147
661,563
Total Shareholders' Equity
155,849
157,080
143,491
161,527
152,695
167,570
187,552
205,173
231,549
256,242
Intangible Assets
Deferred Tax Assets
Other Assets
TOTAL ASSETS
-
Liabilities & Shareholders' Equity
Income Tax Payable
Long-Term Debt
Accumulated Minority Interest
-
-
-
-
-
50
-
-
-
Total Equity
155,849
157,080
143,541
161,527
152,695
167,570
187,552
205,173
278,042
256,242
Liabilities & Shareholders' Equity
339,419
304,247
316,392
690,535
628,568
718,538
741,644
805,537
849,696
917,805
EV/EBIT
EV/EBITDA
Source: HLF and Team Estimates
Appendix 4: Industry Competitor Set
Company Name
High Liner Foods Incorporated
Fiscal Period
09/28/2013
Average
Median
Nichirei Corporation
09/30/2013
Pinnacle Foods, Inc.
09/29/2013
Nippon Suisan Kaisha, Ltd.
09/30/2013
Tyson Foods, Inc. Class A
09/28/2013
The Hillshire Brands Company
09/28/2013
Leroy Seafood Group ASA
09/30/2013
Morpol ASA
09/30/2013
Cermaq ASA
09/30/2013
Austevoll Seafood ASA
09/30/2013
Price
Value
47.13
18.70
12.08
5.23
29.89
2.44
38.37
37.88
33.50
2.13
12.08
6.75
Source: FactSet
12
720.4
3,138.0
1,547.3
1,547.3
3,503.5
675.4
13,183.0
4,659.4
1,828.3
358.3
1,117.8
1,369.0
Shares
Outstanding
15.6
187.9
168.0
285.9
116.3
276.3
370.0
125.0
54.2
168.0
92.5
202.7
EV
987.4
4,282.8
2,644.3
2,526.8
5,434.9
3,485.7
14,514.2
5,257.7
2,329.2
655.0
1,697.8
2,644.3
Revenue
940.6
6,541.4
2,487.1
5,361.1
2,487.1
6,386.9
34,925.3
3,954.1
1,741.2
797.9
1,226.2
1,993.0
EBIT
61.9
348.4
222.8
178.1
361.3
88.7
1,436.3
351.9
222.8
6.5
306.7
183.7
EBITDA
77.6
499.4
337.1
337.1
449.4
289.4
1,963.4
511.3
276.5
34.1
357.5
276.3
15.96x
24.94x
14.40x
14.19x
15.04x
39.30x
10.11x
14.94x
10.45x
100.46x
5.54x
14.40x
12.73x
10.14x
9.57x
7.50x
12.09x
12.05x
7.39x
10.28x
8.43x
19.23x
4.75x
9.57x
CFA Institute Research Challenge
06 Jan 2014
Appendix 5: Weighted Average Cost of Capital (WACC)
in 000's of CAN dollars
Debt
Tax Rate
D*T
Value of Levered
Value of Unlevered
1-T
EBIT
2008
97,809
22.18%
21,694
339,419
317,725
2009
79,827
29.84%
23,820
304,247
280,427
2010
94,179
39.20%
36,918
316,392
279,474
2011
360,018
33.85%
121,866
690,535
568,669
77.82%
30,272
70.16%
35,200
60.80%
38,731
66.15%
44,823
67.05%
62,993
67.05%
69,982
67.05%
93,347
7.41%
8.81%
8.43%
5.21%
8.02%
7.87%
9.97%
6,463
6.61%
0.81%
155,849
1.18
8.2%
5,445
6.82%
1.99%
157,080
0.94
10.1%
5,237
5.56%
2.87%
143,541
1.20
10.5%
5,681
1.58%
3.64%
161,527
3.28
13.1%
24,609
7.97%
0.04%
152,695
3.12
8.1%
20,898
5.57%
2.30%
169,281
3.29
12.9%
19,853
5.57%
4.40%
198,009
2.95
18.7%
0.4592
0.5408
6.53%
0.5163
0.4837
7.54%
0.4535
0.5463
6.62%
0.2339
0.7661
3.86%
0.2429
0.7571
6.02%
0.2332
0.7668
5.88%
0.2529
0.7471
7.52%
Ru
Interest Expense
Rd
Ru-Rd
Equity
D/E
Re
E/V
D/V
WACC
2012 2013F
2014F
2015F
308,589
370,212
345,642
388,878
32.95%
32.95%
32.95%
32.95%
101,680
121,985
113,889
128,135
628,568
718,538
741,644
805,537
526,888
596,553
627,755
677,401
2016F
2017F
379,942
426,150
32.95%
32.95%
125,191
140,416
849,696
917,805
724,505
777,389
67.05% 67.05%
102,687 118,942
10.16%
67.05%
137,327
11.01%
11.84%
22,122
22,458
5.57%
5.57%
4.59%
5.44%
231,352 304,221
2.93
2.67
19.2%
20.7%
27,538
5.57%
6.27%
336,780
2.58
22.7%
0.2547
0.7453
7.67%
0.2725
0.7275
8.37%
0.2792
0.7208
9.03%
USED AN AVERAGE TAX RATE OF 32.95% for all years
Source: HLF, Team Estimates
Appendix 6: Key Financial Ratios
KEY FINANCIAL RATIOS
2008
2009
2010
2011
2012 2013E
2014E
2015E
2016E
2017E
Receivables (X)
9.87
10.05
10.43
9.57
11.19
12.21
14.73
15.87
18.46
18.83
Fixed Assets (X)
10.32
10.50
9.93
6.64
10.59
8.62
8.68
8.03
8.55
7.70
Total Assets (X)
1.81
2.06
1.85
0.97
1.50
1.37
1.61
1.63
1.85
1.74
EBITDA Margin (%)
6.26%
7.06%
8.05%
8.16%
8.74%
8.77%
9.46%
9.43%
8.96%
9.95%
EBIT Margin (%)
4.91%
5.61%
6.62%
6.70%
6.69%
7.12%
7.83%
7.80%
7.58%
8.58%
Net Profit Margin (%)
2.30%
3.15%
3.39%
2.72%
0.23%
2.60%
3.63%
3.29%
3.58%
4.12%
Return on Assets (%)
4.18%
6.49%
6.26%
2.63%
0.35%
3.55%
5.84%
5.37%
6.60%
7.18%
0.73
1.07
1.22
1.19
0.14
1.67
2.84
2.84
3.68
4.32
9.11%
12.57%
13.81%
11.26%
1.44%
15.23%
23.10%
21.10%
20.18%
25.71%
Turnover
Profitability
Earnings per Share
Return on Equity (%)
Solvency
Net Debt-to-EBITDA (X)
2.54
1.80
2.00
6.60
3.75
4.29
3.06
3.13
2.70
2.68
Net Debt Ratio (%)
30.89%
26.88%
30.02%
52.80%
49.19%
52.22%
48.06%
49.30%
47.45%
53.87%
Long-term Debt Ratio (%)
18.99%
17.60%
14.91%
34.76%
34.14%
38.35%
35.30%
36.57%
35.01%
38.90%
Interest Coverage (X)
4.68
6.46
7.40
7.89
2.56
3.35
4.70
4.64
5.30
4.99
Current Ratio (X)
1.90
2.26
1.65
1.51
1.55
1.51
1.48
1.53
1.56
1.55
Acid Test Ratio (X)
0.39
0.43
0.30
0.18
0.17
0.16
0.17
0.16
0.18
0.23
0.22
1.4
0.33
0.39
0.42
0.7
0.94
1.29
1.6
1.76
Liquidity
Per Share Data
Dividends
Source: HLF, Team Estimates
13
CFA Institute Research Challenge
06 Jan 2014
Appendix 7: Multipliers Price
Calculating Target Price (000's)
EV (Enterprise Value)= CF2014/(1+r) 1 +CF2015 /(1+r) 2 +CF2016 /(1+r) 3 +CF2017/(1+r) 4 +CF2017 (1+g)/(r-g)
EV= $
Equity= EV-(ST + LT Debt-Cash & ST Investments)
1,163,422.64
= $
=
Target Price= Equity/Common Shares Outstanding
= $
Terminal Value Assumptions
Growth rate
WACC (2014)
793,210.94
51.97
2%
7.52%
Source: HLF, Team Estimates
Appendix 8: Multipliers Pricing
Name
High Liner Foods
Average
Median
Nichirei Corporation
Pinnacle Foods, Inc.
Nippon Suisan Kaisha, Ltd.
Tyson Foods, Inc.
The Hillshire Brands Co.
Leroy Seafood Group ASA
Cermaq ASA
Austevoll Seafoods ASA
P/E 2013E
19.86
15.73
17.19
17.30
17.19
12.82
12.08
20.25
9.11
20.69
12.30
Multipliers Pricing
P/E Peers Median
EPS
Price from P/E Ratio
Weights for years
Average Price
Weight for Multipliers
Price from Relative Valuation $
P/E 2015E
15.86
15.87
12.22
12.60
11.55
12.10
16.10
1.78
14.40
1.95
16.00
12.60
14.60
12.10
21.00
18.40
7.80
11.70
7.10
7.60
11.70
7.30
2014E
12.60
1.67
21.04
50%
33.81
50%
32.97
Target Price
Price from Relative Valuation
Weight for Relative Val.
Price from DCF
Weight for DCF
Target Price
P/E 2014E
EV/BITDA
2013E
12.50
8.94
7.86
7.68
11.78
12.04
6.89
9.73
7.86
6.71
5.30
2015E
12.10 EV/EBITDA Peers Average
3.85 EBITDA (000's)
Cash+ST Investments
Debt
Equity
Shares outstanding (000's)
46.59 Price from EV/EBITDA
50%
32.97
50%
51.97
50%
$
42.47
Source: HLF, Team Estimates
Disclosures:
14
EV/EBITDA
2014E
EV/BITDA
2015E
10.80
8.40
7.40
6.20
6.20
10.00
9.60
6.00
9.60
5.20
5.10
4.10
6.69
5.80
5.80
9.10
9.20
5.70
8.90
4.80
4.80
3.50
2014E
2015E
7.40x 6.69x
112,823
124,111
10,787
8,287
356,429
397,165
467,674
512,969
15,262
15,262
30.64
33.61
50%
50%
32.13
50%
CFA Institute Research Challenge
06 Jan 2014
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be
reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The
information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute
investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a
recommendation by any individual affiliated with CFA Society of Poland, CFA Institute or the CFA Institute Research Challenge with regard to
this company’s stock.
15