Analysis of Bell Food Group AG (BELL:SWX)

Bell Food Group is a Swiss company, whose origins date back to the early 18th century, active in the production and distribution of food, particularly meat. The company is majority-owned by the number 2 in Swiss retail, Coop, which enjoys a quasi-monopoly situation with Migros. However, this supremacy has been partially challenged over the past ten years with the arrival of German discounters Aldi and Lidl, as well as by online commerce. Bell is one of the European leaders in its product ranges and is number one in Switzerland. The offer includes meat, poultry, charcuterie, fish and seafood as well as Convenience products such as salads, sandwiches, ready-made meals and pasta. The company has more than 10,000 employees in 10 countries. Bell has launched a takeover bid for Hügli Holding, another very fine Swiss company in the food sector in which I am a shareholder.

Valorization

Bell is trading at a fairly decent price, at 13.7 times recurring earnings and 0.41 times sales. It is a little less good relative to tangible book value, with a ratio of 2.33 and especially relative to free cash flow, with a ratio of 32.6. This is a clear inconsistency that raises a first point of concern.

The dividend yield is correct, with 2.18%, even though the payout ratio compared to earnings remains cautious, with only 29.83%. A priori we are dealing here with a stock that has a good margin of increase in its dividend. The company has also regularly increased it in the past, at an annual rate of nearly 6% over the last five years.

However, if we look at the payout ratio in relation to free cash flow, and not in relation to profits, the situation is much less favourable. Indeed, more than 70% of FCF is squandered in dividends. The margin of progression and safety is therefore very low from this point of view. We logically find here the same inconsistency as when we compared the price in relation to profit or FCF. Let's continue the analysis a little further to try to understand what is happening.

Balance sheet & result

Dividends, profits and asset values are increasing over the long term. Bell is quite successful in creating value for its owners over the long term, which is reflected in the price, which has doubled over the past ten years. However, there is once again a slight problem with liquidity. Although it followed a positive trend until 2016, it fell by almost CHF 179 million in 2017. The current ratio has thus fallen from an extremely comfortable position in 2016 (2.8) to just 1.26 a year later. The quick ratio is now even at just 0.76. The large Swiss butcher is certainly not about to go bankrupt, given its other good fundamentals and its vested interest, but it is no longer as comfortable as in the past when it comes to meeting its current financial obligations.

On the positive side, the gross margin is quite good and slightly increasing, at 37%. The net margin is certainly not huge, with 3.3%, but in line with a company in the food sector. On the other hand, the free cash flow margin is very low, with only 1.27%, which confirms the cash flow concerns already noted above.

From a profitability point of view, however, the situation is very good, since Bell is showing an increase in return on assets, at 5.11%, for an appreciable ROE of 12.8%, which is really very good for this type of industry. Under these conditions, even the cash flow profitability of assets is quite correct, with 7.7%.

Long-term debt has fallen significantly (CHF 202 million) compared to the previous year, with this amount being transferred to current financial obligations due to a loan maturing on 16 May 2018. The ratio of long-term debt to assets has thus fallen from 33.2% to 24.3%. Despite this, we are still at very high levels. Total debt thus represents 1.67 times equity and Bell would need more than 16 years to repay it based on the free cash flow achieved in 2017. This is obviously far too much.

Concerning the shares in circulation, the situation is interesting for shareholders since their number has not changed for many years.

Conclusion

Bell is a company with a very long history and which still benefits from a competitive advantage. It is a simple business, with relatively low competition in Switzerland, low risks of technological obsolescence and an activity little subject to economic and financial upheavals, which is confirmed by a beta of only 0.25.

However, for the past year there have been concerns about liquidity, which has had repercussions on the share price, which has been on a downward trend since then. This decline in cash reserves, which is not linked to losses, should normally result in an increase in assets (investment transaction) or a decrease in debt (financing transaction), but strangely enough this is not the case.

If we look at the stock from the point of view of its profits or sales, its price seems attractive. On the other hand, from the point of view of free cash flow, the situation is quite different, not to mention that the latter calls into question the progression of the dividend.

It is truly heartbreaking, as I appreciate this company that I have owned since 2011, but this situation means that I have to sell my Bell shares.