Price: $18.36
Shares: 13.2mm
Market Cap: $250mm (USD)
Cash: $75mm
Debt: $0
EV: $175mm
I wanted to introduce G-Willi Food International (disclosure: no position) and get a discussion going around the business. This one came across my radar after reading a recent press release where the company is showing explosive growth due to what seems to be COVID related demand. I’m interested to see if this type of growth is sustainable and if consumers have made a shift to pre-packaged easy to obtain food products (see: MMMB), if their investments in sales and marketing are paying off, or if this is just a temporary fad due to the pandemic that is set to flame out once things return to normal.
Business
G-Willi Food is an Israeli based food company that develops, imports, exports, markets, and distributes food products worldwide. The company was founded in 1994 by Joseph and Zwi Williger (now President and co-Chairman) and specializes in ‘kosher’ foods (foods that conform to Jewish dietary regulations). WILC operates brands such as Del Monte, Daawat, and Sera, and most of their food products are non-perishables like canned fruits and vegetables, pasta and rice, oils, cookies, tea, and frozen foods. WILC sells to approximately 1,500 customers including supermarket chains, private markets, mini-markets, wholesale distribution, food manufacturing, catering halls, hotels, and hospitals. As of now, 99% of WILC’s revenue is derived from Israel with less than 1% made up of exports outside the country, and boasts 1,250 customers utilizing over 2,500 ‘selling points’ in Israel. Fifty percent of the company’s sales are to large supermarkets with better pricing terms with the remaining 50% allocated to smaller retailers. Customer concentration is limited, with one grocery store, Shufersal, making up 14% of sales. The bulk of sales are derived from dairy, fish and canned vegetable products, and there are no long term contracts or purchase agreements in place.
G-Willi’s sales and profits have historically been pretty stable through good and bad economic times, but recently the company has experienced explosive growth which management attributes to a new CEO, introducing new products, better inventory management and directing more resources to the sales organization. WILC has grown sales in the past year by >25%, and operating profit >70%. These increases are taking place on the back of minimal increases in expenses, demonstrating some decent operating leverage (I don’t know the product / margin mix or G-Willi’s ability to raise prices, which may be contributing to some of the increases as well) and causing me to be curious about the sustainability of this new found growth. After doing some further reading, it looks like G-Willi started to develop their own branded food products as opposed to just serving as a distributor for both owned and distributed brands. The food development efforts started a few years ago, and has contributed to recent growth numbers. In addition, WILC can now market themselves as a branded food company as opposed to just a food distributor.
WILC is a small company with no US sales, and the best direct comp I could find is Strauss which isn’t growing at nearly the same pace yet trades for >15x EBITDA. In the US, fast growing food businesses can trade north of 20x EBITDA. There is a history of corporate governance issues here as well as illiquidity and short track record as a branded food company, but if WILC can continue to grow I can see the valuation changing as the market picks up on the story.
Industry Notes
The Israeli food market is dominated by just a handful of companies — Tnuva, Unilever Israel and Osem’s holdings. The products from these large distributors tend to dominate the “eye-level” shelves in the big supermarkets. As smaller producers have testified on Israeli TV in the past, getting into the big supermarkets is Herculean. Being relegated to top or bottom shelves where few people look is then par for the course.
The food industry is a microcosm of the broader Israeli economy which is dominated by a handful of families who consolidated their power and influence over decades of national sovereignty (leading to a very high cost of living). Aspects of the food market are controlled by these families, leaving consumers with lots of supply but restricted competition. This condition translates into high, but stable, prices and nearly assured profits for the big guys, but at the same time leaves room for smaller niche players with which the mass market food suppliers aren’t yet threatened by, or may acquire down the road.
With that said, WILC has the ability to sell into strong demographics. WILC’s target market is a country with a young and growing population. Israel’s natural population growth is ~2% annually which includes one of the world’s highest fertility rates and an expanding middle-class. Life expectancy in Israel tops 82 years, four years more than that in the U.S. and higher than that in Hong Kong, Japan, Switzerland, Europe on average, and Singapore. In addition, growing middle classes consume large amounts of dairy products, which is a segment that makes up nearly 40% of G-Willi’s sales.
These factors are reflected in food and beverage segment data. The CAGR (2020-2024) rate is 11.6%, driving sales to possibly top $163 million by 2024 (before the impact of COVID-19 on the food industry is accounted for).
Management / Chairman
Joseph and Zwi Williger own 62.5% of the business through an entity called B.S.D. Crown Ltd. During the past three months, insiders purchased around $1.8 million in shares.
Historically, corporate governance has been an absolute mess and these guys haven’t returned much capital to shareholders. Given the large cash balance and now increased profitability this might be an issue and weight somewhat on the stock.
Of note, during 2016, the company’s Co-Chairman was arrested for fraud. He was suspected of financial reporting violations, false reporting, aggravated fraud and money laundering. He was fired, along with the CEO at the time and the entire board was replaced. The chairman was forced to sell his shares, and despite the mess here, the business continued to chug along and no supplier relationships were lost / damaged.
As part of an odd backstory related to the above, Zwi Williger sold the majority control of the business in 2014 to a group that turned out be criminals. The buyers were ineffective in managing the company and loaned $3mm of company cash to a sketchy hotel in Austria backed by an Azerbaijani and Austrian bank where there were apparently some related party issues. The details are not clear, but WILC has since recovered most of the loan. The buyers of the company were arrested in 2016 for fraud related to this loan at which point Zwi Williger began to acquire shares in the holding company to regain control and did so by 2017. He then threw anyone and everyone associated with the prior owners out. It is worth emphasizing that the Willigers had no connection to the company when this loan/fraud occurred.
In addition to the core business, oddly enough, management also runs a non-bank credit arm called W.F.D. (Import, Marketing and Trading) Ltd., a wholly-owned and controlled subsidiary of the Company. The activity is funded from the Willi-Food group’s own resources and executed in parallel to the existing activity of importing, marketing and distributing of food products. This lending arm deploys capital from the company’s balance sheet. For the YE 2019, from a deployed capital base of $12.3mm, WILC generated $5.1mm in net finance income. These are short term loans that range from 5 to 24 months.
As mentioned above, the Willigers control 62% of the business and are now re-dedicated to growth and getting the story out there.
Valuation
WILC outsources manufacturing, which allows them to focus on marketing, distribution and branding, and if they can continue to introduce new products, conduct brand extensions and gain some market share (very low single digit share of the Israeli market right now), I think we could see gross and EBITDA margins lift in the near future. This is especially true given that they are now asset light on the manufacturing side. While the stock has seen some real momentum recently, WILC still trades at less than 10x EBITDA, with a balance sheet holding around 30% of the market cap in cash. Given that WILC is in mega growth mode right now, free cash flow might come in a bit low or nonexistent due to working capital investments, but once the business scales EBITDA should closely approximate free cash flow.
For the trailing twelve months, WILC generated nearly $20mm in EBITDA. With an enterprise value of around $175mm, you’re looking at a multiple of 8.6x. This would be low for a slower growth distributor, but for a fast growing branded food company? Way too low. Applying the usual microcap discount, at just 12x 2020E EBITDA shares would trade 25% higher, and 50% higher at 15x. You’d have to adjust for the COVID related benefits, so it probably doesn’t make sense to use recent growth rates in future projections. With that said, FY2019 showed 17% growth in revenues. Basically – and part of the reason why I have no position – I have little idea about how to normalize earnings or cash flows right now. The company is hitting record sales / profit numbers, and may be a result of overbuying or hoarding during a pandemic or a few new product introductions (like the company’s Euro Spread) driving a lot of the increased sales.
The balance sheet does provide a ton of protection, but for now this is one for the watchlist.
Potential Catalysts
M&A tuck-ins
Return of capital
Acquisition by a strategic
Entering the export market
Risks:
Temporary demand causing unsustainable increases in fundamentals
C-suite hasn’t been that stable (new CEO hired in March 2020)
Lack of strategy / return of capital
Management has engaged in multiple failed acquisitions in the past
Non-bank finance arm is a strange non-core activity for a food distributor
I have no insight into product placement or visibility for WILC products
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