Analysis of Bell Food Group AG (BELL:SWX)

Bell Food Group est une entreprise suisse, dont les origines remontent au début du 18e siècle, active dans la production et la distribution alimentaire, en particulier la viande. L'entreprise est détenue majoritairement par le n°2 du commerce de détail helvétique, Coop, qui jouit d'une situation de quasi-monopole avec Migros. Cette suprématie est néanmoins partiellement remise en question depuis une dizaine d'années avec l'arrivée des discounters allemands Aldi et Lidl, ainsi que par le commerce en ligne. Bell compte parmi les leaders européens dans ses gammes de produits et il est le numéro un en Suisse. L’offre comprend de la viande, de la volaille, de la charcuterie, du poisson et des fruits de mer ainsi que des produits de la gamme Convenience tels que des salades, sandwiches, menus tout prêts ou pâtes. L'entreprise compte plus de 10’000 collaborateurs dans 10 pays. Bell a lancé une OPA sur Hügli Holding, une autre très belle société suisse du domaine alimentaire dont je suis actionnaire.

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 est correct, avec 2.18%, alors même que le payout ratio par rapport aux bénéfices demeure prudent, avec seulement 29.83%. A priori on a ici à faire à un titre qui possède une belle marge de progression de son dividende. L'entreprise l'a d'ailleurs régulièrement augmenté dans le passé, sur un rythme annuel de près de 6% ces cinq dernières années.

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.

Point positif, la gross margin est assez bonne et en légère augmentation, à 37%. La marge nette, n'est certes pas gigantesque, avec 3.3%, mais en ligne avec une entreprise du domaine alimentaire. Par contre la marge de free cash flow est très faible, avec seulement 1.27%, ce qui confirme les soucis de flux de liquidités déjà constatés ci-dessus.

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.