CORTICEIRA AMORIM (LIS: COR) · The industry's performance is largely determined by residential...

CORTICEIRA AMORIM (NSQ: COR)

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CORTICEIRA AMORIM (LIS: COR)Current Market Price: € 2.00Fair Price (Conservative): € 2.99Expected Return: 50%

Address Corticeira AmorimRua de Meladas,380,PO Box 20,Mozelos- 4536902P +351 227475400F +351 227475410

Website http://www.amorim.ptExchange Euronext Lisbon (NYSE Euronext)Industry Lumber & Wood ProductionMarket Cap € 252.4 Million52 Week Range € 1.27-2.10Beta 0.695Price/Book 0.8Price/Earnings (Forward) 8.2Price/Earnings 8.5

Fundamental Analysis

INDUSTRY ANALYSISThe lumber and wood products sector is a component of the forest products industry,which is comprised of both timber production and primary and secondary processingof wood products. The lumber and wood products industry has been subject to wildswings in production and employment. Given its trade-dependency, the demand forwood products has been shaped by national and international forces. Neverthelessfaced with various trade and economic pressures during recent years, lumber industryhas restructured and remained profitable.

The industry's performance is largely determined by residential construction activity,remodeling activity and consumer expenditure. While the industry was greatlyhampered by slowed housing starts and low consumer spending, demand for industryproducts is projected to pick up as the economy recovers in the coming years. Inparticular, the improving construction market will aid industry demand and bolsterrevenue growth.


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From 2012 to 2017, revenue is forecast to rise, overtaking its prerecession level in 2015.However, the industry will face sustained competition from wood paneling productsunless provided with further government assistance or protection. Particularly, China willincreasingly move into the production of higher value-added wood panel products,challenging revenue gains for domestic manufacturers and increasing global pricecompetition. The wooden industry has broad prospects with the increasing income ofresidents and large consumption. These enterprises are more competitive, leading themarket to further enhance competitiveness of the industry.

INDUSTRY PEST ANALYSIS

KEY REVENUE GROWTH DRIVERS OF CORTICEIRA AMORIM.

Political•Not much political interference.• Governments across major countries support an increased role in energy derived from the

residues of wood.

Economical• Recent slowdown in the economy had an impact on the industry.• Industry is tied to economic growth as the revenue is totally dependant on consumption and

disposable income.• Industry has contributed employment in many countries.

Social• Culture and lifestyle is one of the key positive driving force for the Industry.• Deforestation is strongly opposed by the society due to environmental threats.•Industry encourages entrepreneurship.

Technological• Technology is one of the key driving force for the industry.•Technologically advanced solutions will enable the industry players to enhance their offerings.•A range of manufacturing and timber activities can be improved and enhanced with more

advanced technologies.


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The different business units of the company are the key revenue drivers ofCorticeira Amorim. It is one of the world’s largest producer of cork products andthe biggest multinational of all Portuguese companies. The various business unitscomprises of

CORK STOPPERS: It is the world’s largest supplier of cork stoppers, producing overthree billion units a year, and commanding a 25% share of the global market.The sales of cork stoppers has shown significant increase of 4% in 2012 incomparison to the previous year. The major growth was witnessed in France (4%) and USA(9%). The company is expanding its business unit in other parts ofSouth America such as Argentina by Joint Venture with Corchos de Argentina.The company is enormously investing in the R&D to enhance the quality of theproduct.

FLOOR & WALL COVERINGS: This business unit is known by Amorim Revestimentosproduces distinctive, elegant, resistant and comfortable floors, using cork.Amorim Revestimentos has exclusive manufacturing technology and amultinational distribution network that lets them know and, acting in advance,meet the needs of their Clients. The sales of this unit for 2012 has increased by4.9% from the previous year. The unit has better prospect ahead as a positiveevolution in Eastern European and North American markets. The team is lookingahead to capture new market with enlargement of the distribution network.

COMPOSITE CORK: The Business unit’s sales for 2012 increased by 6% fromprevious year. The significant portion of the growth was mainly due to high salesin USA and Russia. The company outlook highlights that new capacity andtechnology will allow for better profitability in this unit.

INSULATION CORK: This business unit is dedicated to the production of insulationmaterials based on natural raw materials such as cork and coconut. The unit haswitnessed an increase in sales by 2.4% in 2012 from previous year. The unit saleswas however affected due to postponement of few projects and sales drop inItaly which is the second largest market.

SWOT ANALYSIS OF CORTICEIRA AMORIM


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Strength

> Industry leader for more than 130years

> The biggest market share in allproduct segments

> Among biggest multinationals inPortugal.

> Innovative processes to control thequality of organization’s performance.

Weaknesses>Low product mix can hinder thegrowth.> Economy driven business.> Exchange rate volatility erodesbusiness margins.

Opportunities> Enter new regions to tap the potentialmarket

> Develop enhanced distributionnetwork for Europe and otherdeveloping countries such as India,Brazil etc.> Improved technology will allow morediversified product.> Being the market leader, it can acquiremany small companies engaged in woodproducts manufacturing.

Threats> Biggest threat is from the current orensuing economic slowdown>Labor cost is becoming costlier.>Change is labor and environmentalregulation hinders the businessgrowth.


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COMPANY ANALYSISCorticeira Amorim is a Portuguese subholding company belonging to the AmorimGroup. It is one of the largest producer of cork products in the world recognized as theindustry leader for more than 130 years. It is one of the most international of allPortuguese companies, with operations in dozens of countries and continents. Thecompany claims itself to cover the biggest market share in all product segments

1. Cork stoppers: 25% 2. Floor and Wall Coverings: 65%

3. Composite Cork: 55% 4. Insulation Cork: 80% (Source: Company Website)

Corticeira Amorim’s net profit for the year ended December 31, 2012 exceeded EUR 31M, up 22.9% compared to a year ago. This is the third consecutive year of sales andprofit growth. Net sales of Amorim exceeded the threshold of EUR 500 M for the firsttime in the company’s history. Product diversification and increase of exports to extra-European markets as well as improvement in operational efficiency in Amorim’s BusinessUnits have been instrumental in driving the company’s performance.

All the business units of the company have witnessed a robust growth of sales revenue.The Raw Material business unit recorded healthy sales growth, up 18% y-o-y. Despite theharsh summer weather conditions, the international profile of this BU which plays a rolein every cork region of the world, enabled to ensure a stable supply of raw materials.

Cork Stoppers continues to show consistent and continued growth in its businessshowing a comparable increase of 4%. The most important product of the value chaingrew by 1.9% and grew over 20% y-o-y. The major growth was witnessed in France ( 4%)and USA(9%). The company garnered huge profits due to USD exchange rates andrising customers in Portugal.

Sales of Floor and Wall Coverings in 2012 grew by 5% y-o-y, with the sales of productsmanufactured by this BU increasing by 7.4%. As far as markets is concerned, salesincreases continue to be recorded mainly in markets outside Europe, with sales toGermany stabilizing and showing values in line with those of 2011.

Sales made by the Cork Composites in 2012 grew by 6% y-o-y. The largest everinvestment made by this unit was completed in 2012 and will result in a new concept ofhigher added value cork composite product that can be used in various applications.Despite facing unfavorable external conditions, the Insulation Cork business unitperformed admirably in 2012 with its sales growing by 2.3% y-o-y.


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(Source: Company Results)

The company witnessed increase in sales growth much higher than the increase inoperating expenses thus improving the EBITDA to Sales ratio, which exceeded 15% forthe first time in a full financial year and reached 15.4% of sales in 2012 (2011: 14.6%). In2012 EBITDA showed strong growth of 13.8% y-o-y, amounting to EUR 82.5 M. Afterrecording the amounts of non-controlling interests, net profit attributable to CorticeiraAmorim’s shareholders in 2012 was EUR 31.055 M, a 22.9%-increase compared to EUR25.274 M a year ago.

(Source: Company Results)

Corticeira Amorim announced that, through its subsidiary Amorim &. Irmãos, SGPS, SA, ithad acquired a 90.91% stake in the share capital of Trefinos, SL, a company leading agroup of six companies specialized in the manufacture and sale of champagne andsparkling wine cork stoppers. Total assets stood at € 674 M at the end of 3Q12, an


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increase of € 68 M above FY 2011 and € 39 M above the end of the 3Q11 figure. Asdisclosed to the market on June 20, 2012 The incorporation of Trefinos’ assets andliabilities into the consolidated balance sheet has particularly impacted the tangiblefixed assets account (€ 9 M), the Inventory account (€ 10 M) and the Trade Receivablesaccount (€ 10 M). The amount of recoverable taxes (€ 31.7 M) continues to be focusedon VAT receivable (€ 23 M).

Key Data

Year endedDec 12€ 000’s



Revenue 534,240 494,842 456,790Earnings pershare € (Basic)

0.246 0.200 0.162Book Value PerShare € (Euro) 2.41 2.24 2.13Operating Margin

10.4% 10.4% 9.8%Return on Equity 10.4% 8.95% 7.64%Return on Assets 4.63% 4.17% 3.65%Net Margin 5.80% 5.10% 4.49%Asset Turnover 0.80 0.81 0.81Leverage 2.21 2.14 2.09

DUPONT ANALYSISROE=Net Profit Margin x Total Asset Turnover x Leverage

The significant rise in sales revenue in FY2012 compared to FY2011 clearly reflects thegrowth potential of the company. The return on equity in FY2012 increased significantlydue to slight increase in net margin. The return on assets also improved in FY2012. Rise inNet Margin in FY2012 compared to previous year was due to significant rise in salesrevenue. The leverage has increased considerably in FY2012 compared to FY2011 dueto the investment made to purchase approximately 90% of the Trefinos Group.

IMPORTANT HIGHLIGHTS FY 2012

FINANCIAL HIGHLIGHTS

The company registered the best ever fiscal year during 2012 with the salesexceeding 500M€ for the first time.

EBITDA figures in FY2012 up by 13.8% (82.5M€) from previous fiscal year. EBIT figures in FY2012 up by 19.2%(61.3M€) from 2011.


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EBITDA to Sales ratio, exceeded 15% for the first time in a full financial year andreached 15.4% of sales in 2012 (2011: 14.6%).

Net income for the year 2012 was €31,055 million compared to €25,274 million foryear 2011, up by 23%.

Earnings per share basic also increased €0.24 in FY2012 from €0.20 reported inFY2011 up by 23.07%

The total assets rose to €674 million in Q3 2012 from €635 million while totalliabilities rose to €370 million in Q3 2012 from €358 million reported in the sameperiod of previous fiscal.

OPERATIONAL HIGHLIGHTS

Total operating expenses increased to €54 million in Q3 2012 from €47 millionreported in the same period of previous fiscal.

Capex reached €21.4 Million in FY2012 compared to €25.6 million in FY2011. Net debt grew by 3.5% (€121.6 million) in FY2012 compared to €117 million in

FY2011 as an effect of acquisition of Trefinos (€5 million) Gross margin decreased slightly to 50.5% in 2012 compared to 51.2% in 2011. Dividends paid reached to 20.2M€ in 2012 from 12.6M€ in 2011.

RELATIVE VALUATION

COR SONI AOR 0KD2

MarketCap

€252.4Million

€77.7Million

€65.1Million

_

Revenue(2011)

495Million

€

1,364Million

€

35Million

€

465Million

€Price/Earnin

gs TTM8.3 -1.1 -2.7 3.1

Price/Book 0.8 0.5 0.7 1.3

Price/SalesTTM

0.5 0.1 1.8 0.7

Rev Growth(3 Yr Avg)

1.9 -10.2 -10.3 11.5

EPS Growth(3 Yr Avg)

62.0 _ _ 366.7

OperatingMargin %

TTM

10.4 1.1 -47.7 4.9

Net Margin% TTM

5.8 -5.4 -69.0 2.3


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Corticeira Amorim is one of the market leaders in the cork producing industry. It has nomajor competitors and covers the major shares of its product in the market. The risingsales trend is a clear indication of the stock to perform well in the future provided lowinstability in the economy. The company has expanded into other sectors such as realestate; textiles etc. and is prepared to explore more investment opportunities. Thecompany is among the 100 companies that has been awarded a “Ruban d’Honneur”prize in 2012/13 of the European Business Awards.

ROE TTM 10.4 -36.2 -17.2 4.4Debt/Equity 0.2 2.3 0.9 0.7

Price/Earnings

8.3 -1.1 -2.7 3.1

Price/Book 0.8 0.5 0.7 1.3

Price/Sales 0.5 0.1 1.8 0.7

Price/CashFlow

_ _ -9.4 10.6

DividendYield %

2.4 - 1.8 0.8


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FAIR PRICE CALCULATION

PROFIT AND LOSS ESTIMATES

Fiscal year ends in December. EUR in millions exceptper share data.

(AnnualReportNot YetReleased)

Projected

Full Year 2013

2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 Conservative Optimistic

Revenues 454.00 468.00 415.00 459.00 495.00 534.24572.38 572.38

Costs and Expenses

Cost of revenue 313.00 241.00 218.00 222.00 328.00 260.28 329.23 379.27

Depreciation and amortization 21.00 22.00 21.00 20.00 21.00 21.20 26.31 24.28

Sales, General and administrative 104.00 172.00 160.00 78.00 67.00

Total Operating Expenses 125.00 201.00 179.00 199.00 116.00 212.70 206.52 134.13

Operating Income(Loss) 37.00 26.00 18.00 38.00 51.00 61.26 41.93 58.97

Interest Expense 4.00 6.00 2.39 6.94

Other income (expense) -11.00 -13.00 -10.00 2.00 -6.00 -9.60 -6.94

Income before taxes 26.00 13.00 8.00 36.00 40.00 29.94 46.25

Provision for income taxes 1.00 6.00 2.00 14.00 14.00 9.00 16.19

Net income from continuing operations 24.00 7.00 6.00 22.00 26.00 20.94 30.06

Net Income 24.00 7.00 6.00 22.00 26.00 31.06 20.94 30.06

Net earnings per share:

Basic 0.18 0.05 0.04 0.16 0.2 0.25 0.17 0.24

Diluted 0.18 0.05 0.04 0.16 0.2 0.25 0.17 0.24

Weighted average shares

Basic 130.00 133.00 133.00 127.00 126.00 126 126 126

Diluted 130.00 133.00 133.00 127.00 126.00 126 126 126


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GROWTH RATES AND COST OF EQUITY CALCULATIONS

AT YEAR END 2007-12 2008-12 2009-12 2010-12 2011-12

Total assets 596.00 575.00 525.00 562.00 605.00

Total Liabilities 351.00 328.00 275.00 293.00 323.00

Total Stockholders’ equity 245.00 237.00 250.00 269.00 282.00

Debt Ratio 0.59 0.57 0.52 0.52 0.53

Debt/Equity 1.43 1.38 1.10 1.09 1.15

Return on Assets 4.03% 1.22% 1.14% 3.91% 4.30%

Return on Equity 9.8% 3.0% 2.4% 8.2% 9.2%

Capital Expenditure 25.00 27.00 16.00 16.00 13.00

Non Cash Working Capital 205 153 128 65 148

Change in Non Cash Working Capital 0 -52 -25 -63 83

ROA 2.92%

Retention Ratio 80%

Debt/equity 0.20

Interest rate 6.40%

Tax Rate 30%

Fundamental Growth Rate 2.1%

Income Growth Rates Forecast High GrowthPeriod

Weight

Analysts (Source) Bloomberg.Com 2% 0.2

Last Year Growth Rate 19% 0.3

Fundamental Growth Rate 2% 0.5

Weighted Average Forecasted Growth Rates 7.14%

Expected Debt Ratio 0.55

Beta 0.69

Risk Free Rate 4.00%

Return from Market 13.00% 3 Yr Avg Return S&P500

Cost of equity 10%


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FREE CASH FLOW TO EQUITY AND FAIR PRICE CALCULATION

ConservativeAll Figures in EUR Millions

except per share dataHigh Growth Stable

Year 2013 E 2014 E 2015 E 2016 E 2017 OnwardsGrowth in Revenue 7.14% 7.14% 7.14% 7.14% 4.0%Net Sales 572 613 657 704 732Depreciation 26 28 30 32 34Net Income 21 22 24 26 27CAPEX 24 26 28 30 31Change in Non Cash WorkingCapital

11 12 13 14 8

Cash Flow to equity 25 27 29 31 29

Cost of Equity 10% 10% 10% 10% 10%

Terminal value 474

Present value of cash flows 23 22 22 311

FCFE (In Mil) 377No of shares (In Mil) 126

Share price per share acc to valuationConservative (EUR) 2.99Current Market Price (EUR) 2.00Return 50%


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OptimisticAll Figures in '000s except per share

dataHigh Growth Stable

Year 2013 E 2014 E 2015 E 2016 E 2017 OnwardsGrowth in Revenue 7.14% 7.14% 7.14% 7.14% 4.0%Net Sales 572 613 657 704 732Depreciation 24 28 30 32 34Net Income 30 22 24 26 27CAPEX 24 26 28 30 31Change in Non Cash Working Capital 11 12 13 14 8

Cash Flow to equity 35 27 29 31 29

Cost of Equity 10% 10% 10% 10% 10%

Terminal value 474

Present value of cash flows 32 22 22 311

FCFE (In Mil) 386No of shares (In Mil) 126

Share price per share acc to valuationConservative (EUR) 3.07Current Market Price (EUR) 2.00Return 53%

CORTICEIRA AMORIM (LIS: COR) · The industry's performance is largely determined by residential...

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