Transcript Slide 1

Imperial Sugar Company
Analysis and Valuation
ACC712 Fall 2006
Chunlin Fan, Indah Isnarsi, Taro Nagao, Chanyuan Zhang (Sunny)
December 6, 2006
Business Description
• Buy raw sugar cane, process and market refined sugar.
• Products: granulated, powdered, liquid and brown sugar.
• Own various brands (Dixie Crystals, Holly, Imperial), private labels.
• Channels:
– Grocery Stores (36% of Sales)
– Industrial Manufacturers (49%)
– Foodservice Distributors (15%)
• Facilities located in Georgia and Louisiana.
• Filed for bankruptcy protection in Jan 2001, emerged out in Aug
2001.
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Business Strategy
2005 Annual Report:
“Through innovation that differentiates Imperial Sugar products and
service, we are offering more than a commodity and competing on
superior product attributes rather than price.”
• Concentrate resources in high-margin branded products.
• Reduce supply of purely commodity products.
• Sell-off non-refining operations to improve productivity.
(e.g. Holly Sugar subsidiary in Sep 2005)
= Product differentiation
= Focus on the core
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Key Success/Risk Factors
Key Success Factors
• Management: heading in the right strategic direction.
• Established relationship with buyers (incl. Wal-Mart).
• Relatively stable and predictable end-user demand.
• Strong balance sheet.
Key Risk Factors
• Susceptible to commodity price changes.
• Difficult to differentiate, easy to imitate.
• Overreliance on Southeast (e.g. Hurricane Katrina)
• Dependence on government regulations.
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Accounting Analysis
• Financial statements are retroactively restated to exclude the
operating results from the following discontinued operations:
– Sale of Holly Sugar Co. ($51.1MM, FY05)
– Sale of Three beet processing facilities ($34MM, FY03)
– Sale of Diamond Crystal Brands foodservice business ($121MM, FY03)
• Hurricane Katrina forced temporary closure of Louisiana plant,
undermining FY05 results significantly (one-time item).
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Financial Analysis
Advanced Dupont Analysis:
• Net profit margin plunged in
2005 and gets better from
2006.
• The asset turnover is
increasing constantly due to
increased productivity.
• Leverage ratio is very low,
leaving much flexibility to
take more debt in future.
FY03
FY04
FY05
FY06
1-3Q
Net Operating Margin
8.8%
2.6%
-2.2%
4.5%
NOA Turnover
4.39
4.49
4.67
5.79
38.7%
11.6%
-10.1%
26.1%
Net Borrowing Cost
0.04
0.20
0.21
0.32
Spread (RNOA-NBC)
0.34
-0.08
-0.31
-0.06
Financial Leverage
90.9%
17.7%
5.8%
3.0%
ROE
69.8%
10.1%
-11.9%
25.9%
RNOA
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Financial Analysis
Time-Series Analysis:
• NOA turnover and PP&E
turnover increased constantly
due to improved productivity.
• Debt ratio reduced
significantly in the last few
years, leading to a stronger
balance sheet.
• Gross Margin has high
volatility: after plunged in
2005, Imperial recorded a
historical number in the first 9
months of 2006.
FY03
FY04
FY05
FY06
1-3Q
NOA turnover
4.39
4.49
4.67
5.79
PP&E turnover
6.43
5.76
6.84
10.40
Debt Ratio
9.7%
2.9%
1.9%
1.3%
Current Ratio
1.64
2.12
2.26
2.54
SG&A/Sales
5.4%
5.4%
5.4%
4.7%
Gross Margin
6.8%
8.0%
5.3%
13.2%
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Financial Analysis
Cross-Section Analysis:
• Gross margin of Imperial is
still at the lower end of the
industry.
• NOA turnover is higher than
the larger companies, which is
due to the reconstruction of
Imperial in the last few years.
• ROE of 2006 is high because
sugar price is record high.
Imperial
Sugar
Corn
Products
Hershey's
Tootsie
Roll
Gross Margin
13.2%
16.0%
19.1%
37.7%
Profit Margin
4.9%
4.7%
11.2%
15.1%
NOA Turnover
5.79
1.42
2.29
0.92
25.9%
9.4%
64.6%
14.0%
ROE
Note: We used FY2006 data (the first 9 months)
to calculate the financial ratios.
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Forecasting for 2007
Revenue Forecasting Model:
Revenue = Sugar Sales + By Product Sales + Other Revenue
Sugar Sales = Industrial + Consumer + Food Service + World
US Sugar
Consumption
X
Imperial Sugar
Market Share
X
US Sugar
Price
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Forecasting for 2007
Revenue:
US Sugar Consumption
(000 short ton)
• US sugar consumption increases 1.1%
to 5.8 M short ton (See Chart)
• Imperial Sugar market share: 15.4%
for Industrial/Food Services and 10.2%
for Consumer (as per Q3 2006)
• Sugar price increases 0.2%1 to
$34.32/cwt
• Non-US Sales: 10% of domestic sales
• By product: 1.9% of sugar sales
• Other revenue: 0.4% of sugar sales
• Revenue in 2007: $948M, increased by
1.1% compared to 2006
• Terminal growth rate: 1.7%
12,000
10,000
8,000
6,000
4,000
Total
Industrial
Non Industrial
Linear (Total)
Linear (Industrial)
Linear (Non Industrial)
2,000
1985
1990
1995
2000
2005
2010
2015
Source: Sugar and Sweetener Outlook, USDA, Sept 2006
1 Based on forecasted sugar price increase in 2007 as published in 2006 Outlook of the US and World Sugar Markets 2005-
2015, by Won K. Koo and Richard D. Taylor , Center of Agricultural Policy and Trade Studies, Department of Agribusiness
and Applied Economics, North Dakota State University, August 2006
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Forecasting for 2007
Costs:
Actual
FY2005
• COGS: Steady at 92%
• SG&A: Steady at 5.4%
• Depreciation: Steady at 10.8%
• Capital expenditure: $9.5M in
2007 as planned by management
Forecast Forecast Forecast
FY2006* FY2007 FY2015**
Sales Growth
COGS / Sales
SG&A / Sales
Depreciation / PP&E
Effective Tax Rate
Ext. Items / Sales
2.3%
94.7%
5.4%
10.8%
32.5%
-1.7%
16.7%
86.8%
5.4%
10.8%
32.5%
0.0%
1.1%
92.0%
5.4%
10.8%
32.5%
0.0%
1.7%
92.0%
5.4%
10.8%
32.5%
0.0%
Gross Margin
Net Operating Margin
5.3%
-2.2%
13.2%
5.2%
8.0%
1.7%
8.0%
1.6%
NOA Turnover
Work. Cap. Turnover
PP&E Turnover
4.67
6.25
6.84
5.89
7.20
9.74
5.74
6.73
9.75
5.31
6.74
8.60
-11.9%
31.4%
9.5%
8.1%
Return on Equity
* 1-3Q: Actual, 4Q: Forecast
** Terminal Year
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Valuation
•
•
•
•
Last trade price: 22.44 (Dec 4)
Market Cap: 253.50M
Enterprise Value: 202.91M
Price/Book: 1.57
Our Valuation:
•
•
•
•
Risk free rate: 4.43%
Beta: 0.21
Mkt risk Premium: 5.72%
Cost of equity: 5.63%
Intrinsic Stock Price = $26.97
Sensitivity Analysis:
Terminal Growth Rate
Cost of Equity
Key Market Data:
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Valuation: Detailed Sensitivity Analysis
Discount rate
0.72%
4.63%
5.63%
6.63%
Perpetual Growth Rate after 2015.9
1.72%
2.72%
PV of Cash Flow(%)
PV of Terminal Value(%)
Enterprise value(%)
Net Debt(-)
Equity Value
Estimated Price/Share
P/E
P/B
40%
60%
100%
123,017
181,205
304,223
-46
304,268
28.81
5.9 x
2.0 x
33%
67%
100%
123,017
245,893
368,910
-46
368,955
34.94
7.2 x
2.5 x
25%
75%
100%
123,017
378,315
501,332
-46
501,378
47.47
9.7 x
3.4 x
PV of Cash Flow(%)
PV of Terminal Value(%)
Enterprise value(%)
Net Debt(-)
Equity Value
Estimated Price/Share
P/E
P/B
47%
53%
100%
118,401
131,207
249,608
-46
249,653
23.64
4.8 x
1.7 x
42%
58%
100%
118,401
166,399
284,800
-46
284,846
26.97
5.5 x
1.9 x
34%
66%
100%
118,401
225,779
344,180
-46
344,226
32.59
6.7 x
2.3 x
PV of Cash Flow(%)
PV of Terminal Value(%)
Enterprise value(%)
Net Debt(-)
Equity Value
Estimated Price/Share
P/E
P/B
53%
47%
100%
114,090
99,204
213,294
-46
213,340
20.20
4.1 x
1.4 x
49%
51%
100%
114,090
120,594
234,684
-46
234,730
22.23
4.6 x
1.6 x
43%
57%
100%
114,090
152,925
267,015
-46
267,061
25.29
5.2 x
1.8 x
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