Aryzta AG - Some of our assumptions have not played out, but fundamental value is
not reflected in share price
Aryzta's share price has declined c50% from its peak in 2014. This is disappointing, particularly given its
defensive bakery end-market exposure. While we think that the current share price is underappreciating
Aryzta's strong client relationships and best-in-class productivity, some of our assumptions have not
played out: (1) We thought Aryzta would focus on B2B and not enter B2C via the Picard acquisition,
which leads to question marks over its strategy. (2) We thought Aryzta would free up capacity in the US
to serve new contracts from larger customers. This has not materialised yet. (3) We expected significantly
lower capex, supporting EFCF in case of muted volume growth. This has not yet materialised. (4) Extra
cash costs do not seem to disappear. Our core FY 16 EBIT estimate now includes up to €25m extra cash
costs.
It could take a while to restore investor confidence
Based on investor feedback, we get the impression that trust in Aryzta has suffered significantly due to
profit warnings, strategic questions marks and lack of communication transparency. Hence, we think the
valuation multiple could remain compressed for some time and act as a cap to the share price. It could
take a while to rebuild trust with the investor base. Accelerating LFL sales growth, margin stabilisation,
improved EFCF and a cleaner P&L would be key to supporting investor sentiment.
Despite significant EPS cuts, fundamentals are not reflected in share price
(1) We cut our FY 16-18E EPS by 15-16% due to lower utilisation, contract mix and renegotiations, extra
cash costs now considered core, and higher financing charges due to higher leverage (c4x net
debt/EBITDA in FY 16E, taking into account 75% of the hybrids). (2) Having had contact with suppliers,
competitors and customers, we confirm our view that Aryzta enjoys strong client relationships and high
productivity (after >€1bn investments in new machinery and modern production sites), which
differentiates it in a less developed bakery environment. In the medium to long term, larger bakeries
such as Aryzta should gain market share. In terms of value creation, our key focus is on EFCF, which we
expect in a range of €230-280m over FY 16-20E.
Valuation: New DCF based PT of CHF55 (from CHF65)
On the back of our EPS estimate changes, we lower our price target to CHF55 from CHF65. Aryzta
trades on 11.5x FY 16/17E PE (vs European food producers on 18-22x) with an EFCF yield of 7-8%. Our
Buy rating is unchanged.