Morningstar | BARN Reports Half-Year Results, With Better than Expected Cocoa Profitability; Shares Rich
Non-moat Barry Callebaut reported half-year 2019 results, with sales volume growth at 2.4%, in line with our half-year estimates, and revenue up 3.5% in CHF (6% in local currencies) or 3.5% ahead of our estimates (flat). Operating profit was 2.7% higher than our forecasts, at CHF 301.4 million (up 8.9%), a function of higher EBIT/tonne (CHF 288 versus CHF 280.3 in our model) and volume growth. At the time of writing, shares traded at CHF 1,925, about 28% higher than our CHF 1,500 fair value estimate, which, in turn, given the slightly better EBIT number, we anticipate increasing by a mid-single-digit number after rolling our model forward to account for half-year results.Our fair value estimate equates to a 2020 price/earnings ratio of 22 times, slightly higher than the European consumer staples sector. Although the company's strategy and financial performance is noticeable, we believe Barry Callebaut's sensitivity to a few commodity price movements and highly volatile free cash flows do not warrant a premium. In addition, a combined ratio (at 3.5 times for Europe according to the company), levels still much higher than historical averages over the last decade, is supporting outperformance, especially in the global cocoa segment and this is the main contributor of the latest EBIT/metric ton outperformance. Barry Callebaut's top-line and bottom-line performance, especially its per metric ton profitability improvement for the year (CHF 288/metric ton from CHF 271/metric ton in the same period of 2018 and versus CHF 280.3/metric ton in our model), was largely driven by the cocoa business (CHF 240/metric ton versus CHF 208.5/metric ton in our model) and partially by mix effects in APAC (EBIT/ton up 5.2% year on year in line with our expectations). The global cocoa segment's EBIT/metric ton was CHF 40.5/metric ton in fiscal 2016, a year when the average combined ratio was almost 20% lower than current levels.
Barry Callebaut is a cocoa and chocolate company, engaged in serving the food industry, from food manufacturers to professional users of chocolate such as chocolatiers, pastry chefs or bakers and products for vending machines. Co. offers a range of chocolate and other cocoabased products with numerous recipes. Co. also provides a comprehensive range of services in the fields of product development, processing, training and marketing. Co. is fully vertically integrated along the entire value chain: from sourcing of raw materials to finished products on the shelf. Co.'s operations are organized in three business units: Cocoa, Food Manufacturers, Gourmet & Specialties Products.
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