Business Description:
$140 billion potential market with currently $25 billion market and $38 billion existing customer opportunity
Major Competitors: SpartanNash (NASDAQ:SPTN), C&S Wholesales Groger and Kehe
Minor competitors (serves mostly to restaurants, schools and other small units): Sysco (NYSE:SYY) and US Food Holdings (NYSE:USFD)
Over 60 distribution centers (total 28.8 million sq ft) vs 19 for SPTN (8.2 million sq ft)
Diversified with moat in fast growing natural and organic
Customers:
Chains
Independent retailers
supernatural
retail
Largest customer: Whole Foods with about 18% of revenues in 2020
6 product categories:
Grocery and general merchandise
Produce
Perishables and frozen foods
Nutritional supplements and sports nutrition
Bulk and food service products
Personal care items
2 business segments
Wholesale
Retail
Catalysts:
Changing consumer habits into natural and organic
Deal with Amazon until 2025 for exclusive distribution to Whole Foods
Divestiture of retail business to raise capital for debt repayment
Pandemic favors business
Leased trucks - no fear of depreciation of assets or electrification
Risks:
Took high debt for Supervalu acquisition with high interest payments
Depends on derivatives to handle debt repayments at lower interest rates
Could lose largest customer if Amazon decides not to renew contract in 2025
Financial Analysis:
Revenues of $27.2 billion in TTM up from 26.5 billion in FY20 (ended in July 2020) and $8.4 billion in FY16
91% of revenues from wholesale and 9% from retail
Wholesale revenue growth of 18% from FY19 to FY20
Operating income of 403 million in TTM vs $333 million for FY20
87% of Adjusted EBITDA from wholesale and 13% from retail
Net income of $109 million in TTM vs net loss of $274 million for FY20
Net loss in FY19 and FY20 mostly because of impairment of goodwill of $293 million and $495 million respectively, after the Supervalu acquisition
FCF of $365 million vs $284 million for FY20 (excluding $102 million in divestitures from sales of retail stores)
Owner’s earnings (including divestitures as they offset interest payments to bondholders) of $351 million in TTM vs $382 million in FY20
Balance Sheet
Total assets: $7.78 billion ; total liabilities: $6.63 billion; book value: $1.15 billion
Cash: $49 million, debts: $2.62 billion, current assets: $3.94 million, current liabilities: $2.37 billion
Valuations
My personal Biases:
Bullish on industry
Belief in ability to repay debt with divestitures
Thinking that Amazon won’t choose to have their own distribution system so as not to attract antitrust regulators and keep using UNFI
Assumptions for base case:
Use Discounted Owner’s earnings to calculate intrinsic value
$100 million in divestitures in 2021 and 2022 each
Revenue growth of 10% per year
Profit margins of 1.5% in the long-term (2021 and 2022 lower with synergy costs)
Depreciations of $300 million per year and Capex of $200 million per year
All of owner’s earnings used to repay debt
Discount Rate of 18% till 2026
Terminal Growth rate of 2%
Bull case with extra 10% extra revenues in 2026 compared to base
Bear case (loss of Whole Foods as customer) with 30% less revenues in 2026 compared to base
Shares outstanding grow from 56 million to 70 million
Conclusion
Undervalued even with 50% margin of safety
14% expected returns per year
Debt risk can be offset my divestitures of generation of cash from operations
Moderate risk but high reward potential, BUY rating at current price
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