Description

Aluflexpack is an aluminum flexible packaging producer who produces and sells foil, lid, containers and pouches. Company is HQ in Switzerland, and production is located in Croatia (primary production), France, Poland and Turkey. Main end markets are Coffee & Tea (25% of revs), Pet food (19%), Dairy (17%), Confectionary (13%), pharma (11%) and other food and non-food (15%). Revenues have grown by 13% 5Y CAGR owing to a strong growth in Coffee capsules, pet food categories and smaller acquisitions. EBITDA has grown by 24% 5Y due to operational leverage gained from sales growth. 

AFP was listed on the market in 2019 at CHF 22.5/sh by Montana Tech Components which retains a 53.6% stake. MTC is a conglomerate owned by Austrian billionaire Michael Tojner. Has 2 other holdings - Varta and Montana Aerospace. 

CoGs are ~65% of sales, half of which are aluminum related. Aluminum is bought on a LME 3M + RBP (Rotterdam Billet Premium) + re-rollers cost. First 2 (LME + RBP) costs are pass-through (quarterly lag) to customers while the reroller cost is their burden. Rest of the cogs are plastics, adhesives, films and other raw mats. 

1/2 of growth has been coming from coffee capsules growth as before IPO AFP was able to secure a contract with JDE Peets NV for their capsules and other coffee products. Capsules have been a secular grower for the past couple decades and every 4th cup of coffee in US is made from capsule. It is also estimated that 41% of households own single-cup brewing system, up from 1% in 2005.
Capsules have also been a C-19 beneficiary and both JDE and Nespresso (Nestle) have seen booming sales during the lockdowns. 

AFP has made 3 acquisitions in recent years. In 2018 acquiring Turkish flexible packaging producer focusing on pharma industry, paying €17.2m for 80%, EV/ Sales 1.8x. Second was Top-System, Polish leading flexible packaging producer with focus on dairy products. Price paid was €12.6m for 80% stake, EV/ Sales 1.26x. Latest acquisition announced in April 2022 was Teko, Turkish flexible packaging producer focused on the dairy and beverage industry in Turkey and surrounding markets. Price was not disclosed, but Teko had revenues of €16m in 2021. Would assume price was somewhere in the ~€20m range.

Currently building a new plant in Croatia which will be finished by the end of 2022. CAPEX €65-70m, of which 60% has been spent in 2021. By 2025 new plant will enable Aluflexpack to earn additional €100m in sales. Assuming they are able to reach €420m in revenues by 2025 (2022 guidance + €100m in new revenues from new plant), 4Y revenue CAGR would be 12% from a 2021 base. Maintenance CAPEX is ~3% of sales. Last years has been investing into expanding capacities and new plant, and CAPEX has been on average ~14-15% of sales.

Despite heavy investments, AFP ND/EBITDA is 0.45x and is able to further invest into expansion by taking on additional leverage. All packaging peers are leveraged (3-4x ND/EBITDA).

EBITDA margin has reached 15.9% in 2021 from ~10-12% in 2016 – 2017 as all cost articles declined. Personnel and other OPEX from operating leverage and CoGs due to cost deflation. After rapid increase in aluminum price during 2021, 2H21 came in weaker with EBITDA margin of 14.6%, from 16.9% in 1H21. Average aluminum price increased by 45% in 2021 and further by 32% in 1Q22. Aluflexpack has pass-through mechanism for aluminum price with a quarterly lag but is unable to pass other costs such as plastics, films and adhesives as well as aluminum rerolling cost.

Guided 2022 revenue is €320m and EBITDA €37.5m, 11.7% margin. 10.3% decline in EBITDA and margin dilution of 4.2pp has weighted heavily on stock, shares are down 57% from 52wk high. But valuation has improved dramatically. At a low margin of 10.3%, EV/EBITDA is 8.2x, and assuming a normalization in costs, at 2021 EBITDA EVEBITDA is at 7.2x. 

AFP screens terribly on any metric below EBITDA compared to packaging peers (Amcor, Sonoco, Sealed Air, Huhtamäki). Reason is speed of amortization. AFP amortizes equipment twice as fast as peers. Estimated useful life of PP&E is ~20y for peers while only 8.5x for AFP. Remaining useful life is ~10y for the peer group and 5y for AFP. D&A of sales was 8.6% in 2021 and 3.4% for peers. EBITDA margin for the peer group is ~14%. 

Peers trade at ~9x fwd EBITDA compared to 8.2x guided figures with trough margin. 

Thesis here is pretty simple. Inflation has weighted heavily on costs, sending margins down to low teens. 2022 should be a transformational year due to construction of new production site and inflation pressure. Looking forward, its not entirely unreasonable to assume normalization in margins to ~14% and some growth in revenue. A lot of the inflation is coming from commodities, which have skyrocketed. These tend to reverse sharply to the mean which at some point will create a significant margin opportunity for the company. Company trades at attractive multiple and doesnt require much to work out. 

Assuming they are able to ramp-up new site by 2025, adding €100m to 2022 guided base, 2025 revenues would be €425m and at 14% margin EBITDA €59.5. Puts valuation at 5.2x EV/EBITDA and assumes only growth coming from the new production site. Also if estimates stands, FCF Yield will grow from ~4.5% in 2022 to 10% by 2025. 

There are some risks and negatives:

1. Some of the Croatian plants are not owned, but leased from Michael Tojner (main owner), but rates are supposedly arms-length.

2. Revenue is concenrated within 3-4 customers.

3. Although aluminum is recycable, a lot of products are laminated and multi material. I doubt more than 20% of their packaging is recycled. EU has set a target for 70% of packaging to be recycable by 2030 which might favor paper packaging or recycable plastic. 

Catalyst

1. Inflation fizzling out and reversal to mean in commodities