Frutarom Industries Ltd.'s (TASE: FRUT; LSE:FRUT; Bulletin Board: FRUTF) share price is still on an uptrend, rising 2% yesterday and 12% in the past two weeks. The share price has surged 70% over the past year, pushing the company's market cap up to over NIS 20 billion, reflected a profit multiple of 40. The return on the company's share in the past five years has been over 600%. Frutarom deals in ingredients and flavor extracts for the food and beverages industry.
Following the recent rises, Frutarom's market cap has overtaken that of Israel Chemicals (TASE: ICL: NYSE: ICL), putting the company in eighth place in market cap on the Tel Aviv Stock Exchange (TASE), close to Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT). The share of Mylan N.V. (Nasdaq: MYL; TASE: MYL) will soon be delisted from the TASE, putting Frutarom in seventh place, or sixth place, if it overtakes Elbit Systems.
Despite the boom in Frutarom's share over the past year, (or perhaps because of it, since it is supported by improvement in the company's results), Fidelity Fund, an important party at interest in Frutarom, has increased its holdings in the company, reaching a 9% stake at the end of the 2017.
The controlling shareholder in Frutarom is John Farber, 92, and his family, through the ICC company, which they control. CEO Yehudai owns 0.8% of Frutarom, with a current value of NIS 160 million, after selling parts of his holdings over the past two years at a profit of tens of millions of shekels.
Leumi Capital Markets analyst Gil Dattner spoke with "Globes" about the impressive progress in Frutarom's share in recent years, saying, "For a long time, we have recommended "Underweight" for the share, because we think that it is expensive."
"Globes": Because of the high multiple?
Dattner: "Yes, but that's not the only reason. Keep in mind that we are in a world in which multiples in general are not at all low, and are especially high in the flavors and spices sector, not just for Frutarom. There is a combination of factors here. The company's management is doing excellent work, its results have been good, and it continues to grow, mainly through acquisitions, which is reflected in the share price. This is the world we live in: a very low interest rate environment and very low bond yields, so investors are looking for substitutes."
True, but why Frutarom?
"A business with relatively low risk, a stable sector, and if possible, a growing company - and the food sector fits the bill. In addition to acquisitions, Frutarom also has fine organic growth and a supportive macroeconomic environment with nice global growth. As of now, there are no signs of a change in any of these factors. On the one hand, I see no change in the trend for Frutatorm, but in our opinion, anyone buying the share should know that the potential for value enhancement at the current pricing is limited."
Excellence: Positive and possibly conservative
Two weeks ago, Frutarom completed its merger with Migdal HaEmek-based Enzymotec, which develops, produces, and markets special ingredients for nutrition and medicinal food, in a deal reflecting a value of $290 million for the acquired company. The acquisition was Frutarom's largest to date, and the company plans to merge Enzymotec's activity with Frutarom's special natural ingredients division in order to take advantage of the synergy between the two companies.
In your opinion, did Frutarom pay a fair price for the Enzymotec acquisition?
Dattner: "The acquisition multiple was higher than they price they usually pay, but the acquisition was logical from the standpoint of the match with Frutarom's business and the potential synergy and saving on costs. I'm inclined to believe the Frutarom will make Enzymotec a successful acquisition, mainly because the company's management has proven in recent years that it is able to get the most out of the companies it merges with. We'll only know for sure in several years, however."
Excellence Investments Ltd. (TASE: EXCE) co-head of equity research and senior analyst Roni Biron also thinks that Frutarom's share price is high. Biron yesterday revised his review, raising his target price for the share from NIS 300 to NIS 330, 5% lower than the market price. "We still have a positive view of Frutarom's business momentum, which is likely to continue and exceed our forecasts and those of the market, but the risk and benefit are fairly balanced at the current levels, and we are retaining our "Market perform" recommendation.
"In our estimation, most of the risk comes from possible changes in the business environment and the multiples environment, as well as the rapid growth through mergers and the accompanying operational and management challenges. On the other hand, our valuation is likely to prove conservative if the current growth rate persists beyond 2018, or under a possible scenario of an acquisition of the company," Biron adds.
Frutarom made 12 acquisitions in 2017 (including the Enzymotec takeover. Its revenue totaled $1 billion in the first nine months of the year, 16.5% more than in the corresponding period in 2016.
Sales in the company's core business of flavors and special ingredients grew 17% to a record $938 million. Operating profit was up 35% to $158 million, and net profit rose 34% to $110 million.
When Frutarom reported its results, CEO Ori Yehudai raised the company's revenue target for 2020 by $250 million to $2.25 billiojn, with an EBITDA rate of 23% of sales, meaning an operating cash flow profit of $520 million. Assuming that this target is achieved, Frutarom's projected current EBITDA multiple for 2020 is 11-12.
Published by Globes [online], Israel Business News - www.globes-online.com - on January 30, 2018
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