EUR 850.00 For Business Accounts Only

Morningstar | Strong Volume Growth Underpins Fiscal 2017-18 Results for Barry Callebaut; Shares Expensive

Barry Callebaut reported in-line fiscal 2018 results for the 52 weeks to Aug. 31, with sales volume growth at 6.3% (versus 5.8% assumed in our model) and revenue up 2.1% in CHF (flat in local currencies). While operating profit increased 20.4% year on year, free cash flow declined by almost 35% driven by higher cocoa bean prices. At the time of writing, shares trade at CHF 2,000, some 30% higher than our CHF 1,500 fair value estimate, which, in turn, given the in-line print we do not anticipate changing after rolling our model forward to account for fiscal 2018 result.

Our fair value estimate equates to a 2019 price/earnings ratio of 23 times roughly in line with the European Consumer Staples sector. We expect a 4.5% top-line CAGR and 8.1% average operating margin over the next five years, the result of a gradual slowdown in outsourcing activity and improved profitability through cost leverage and operating efficiencies.

We were pleased with Barry Callebaut's top-line and bottom-line performance and especially with its per metric ton profitability improvement for the year (CHF 272/metric ton from CHF 255/metric ton in fiscal 2017), which largely reflects mix and efficiency improvements in the cocoa business. However, for the current valuation levels (almost 28 times earnings) to be justified, we note that per-metric-ton profitability improvement should continue to surprise on the upside (we project 3.1% CAGR over the next five years versus a broadly flat figure over the last decade). Management confirmed midterm guidance of 4%-6% average volume growth and EBIT growth on average above volume growth.

More specifically, in Europe, volume growth was up 6.8% with operating profits growing by 11.2% supported by volume and product mix. Following a new long-term supply agreement and D'Orsogna Dolciaria acquisition, we expect the company to continue to outperform the mature European chocolate and confectionery markets in the years to come (5.3% average annual volume growth expected over the next five years).

In the Americas, the group saw volumes rising by 6% with operating profit up 9.2%, a reflection of product mix and strong operational performance. Here again, we expect the company's factory expansions and the recent acquisition of Gertrude Hawk Ingredients to support our expectations of above-market volume growth (4.6% average annual growth over the next five years).

In Asia, one of the highest growth engines of the group, volumes were up 16.2% with operating profit rising 20.2% driven by the gourmet business (higher margin) and market share growth. The region's high fundamental underlying growth combined with the company's expanded production capacity in Singapore should help growth in the following years (8.8% average annual volume growth over the next five years).

Finally, the global cocoa segment saw volumes growing by 3.9% and a significant improvement in profitability (up 28.3%) on the back of the cocoa leadership project that has successfully been completed and a better average combined ratio (above the previous year), which was, in turn, the result of lower cocoa bean prices and robust demand for cocoa products.

The proposed dividend was hiked to CHF 24 per share (versus CHF 23 per share in our model), which represents a 37% payout ratio.