BRRLY - Barry Callebaut: A Buyer At These Levels

2023-11-07 10:30:00 ET

Summary

• Barry Callebaut reported stronger-than-expected financial results for FY 2023, with a 9.7% increase in revenue and a 20% increase in EBIT.
• The company plans to increase production capacity and may be in a position to consolidate the (fragmented) market through potential acquisitions.
• Despite the high share price, the company's growth prospects make it an attractive long-term investment.

Introduction

Barry Callebaut (BYCBF) (BRRLY) is the largest producer of chocolate and chocolate-related ingredients and its strong market position has helped its share price to continue to trade at relatively high levels. As the share price has come down a bit while Barry Callebaut continued to grow in FY 2023, I wanted to have another look at this company.

Barry Callebaut is a Swiss company and its Swiss listing ( ticker symbol BARN ) for sure is the most liquid. The average daily volume in Switzerland is approximately 11,000 shares. At a current share price of approximately 1,475 CHF, the total value of the daily volumes is almost 17M CHF. I will use the Swiss Franc as the base currency throughout this article as that's the currency Barry Callebaut reports its financials in.

The full-year results are now in - and they are stronger than I had expected

This updated article will have two important pillars. First if all, I will discuss the financial results generated in FY 2023. As the financial year ends in August, the company has just published its FY 2023 results and this obviously provides an excellent look under the hood. In the second part of this article, I will discuss the main takeaways of the capital markets day which was organized by the company last week.

Although FY 2023 was pretty volatile, Barry Callebaut was able to report pretty strong results. It sold a total volume of 2.3 million tonnes and although this is about 1.1% lower than in the preceding financial year, Callebaut was able to hike prices which resulted in a total revenue increase of 9.7% in local currencies and about 4.7% when expressed in Swiss Francs.

Generating a higher revenue is a good start but what ultimately matters is if this also translates into a higher profit. The image above shows that is indeed the case. While the revenue increased by just under 5% in CHF, the COGS increased by just 3.6% and this pushed the gross profit higher by in excess of 10%.

Other operating expenses increased as well, but this still resulted in an EBIT increase of almost 20% as Callebaut reported an EBIT of just under 660M CHF in FY 2023. And the company was able to just continue showing an improved performance down the line. The net income attributable to Barry Callebaut was 444.4M CHF, which resulted in an EPS of 81.04 CHF. A very substantial increase from the 65.81 CHF it reported in the preceding financial year.

A portion of the net income will be paid out to its shareholders as a dividend as the company is proposing to pay a dividend of 29 CHF per share which represents a payout ratio of 36% based on the attributable net income.

In my previous article, I also had a look at Callebaut's cash flow performance and I think that still is an important element to determine whether or not the company is a "buy" at the current levels.

As you can see below, Callebaut reported an operating cash flow of 330.5M CHF but this includes a 5M CHF higher tax payment than what was owed while it also includes a net working capital investment of just under 343M EUR.

However, we also still have to deduct the 44M CHF in lease payments (which you can find below, in the financing cash flow overview).

This means that on an adjusted basis, the operating cash flow is almost 635M CHF and about 648M CHF if you also include the interest received. The total capex was approximately 241M CHF (including intangibles) resulting in an underlying free cash flow of 407M CHF. Divided over the current share count of 5.48M shares, this results in a net free cash flow of just over 74 CHF per share.

The capital markets day provided excellent insights

During its most recent capital markets day (which was held on Nov. 1), Barry Callebaut emphasized there are plenty of market opportunities. As you can see below, the entire market is expected to grow at a low single-digit percentage, but more importantly, Barry Callebaut could perhaps play a role in further consolidating the market. The image below shows that although Barry Callebaut is the largest player in the chocolate ingredients space, there are plenty of small competitors that could perhaps allow a combined entity to generate synergy benefits through economies of scale.

As the chocolate market continues to grow, and as Barry Callebaut is investing in additional production capacity in for instance Canada and India, we should see Callebaut's results increase in line with the market.

After an initial transition period, Callebaut expects to see its volumes increase by at least a low single-digit number while it anticipates the EBIT to increase by a "mid single digit to a high single digit" percentage. This won't happen overnight. Callebaut is budgeting a two-year transition period and anticipates the EBIT growth to start in FY 2026.

The ultimate goal is to reach an EBIT margin of 10%, up from the 7.8% EBIT margin in FY 2023 thanks to some cost savings that are outlined in the BC Next Level plan.

As there are costs associated with this program, it's understandable why the company is expecting a transition period of two years before we will see a noticeable increase in the EBIT.

Investment thesis

Based on its current share price of 1,475 CHF, Barry Callebaut definitely isn't cheap right now. The company trades at about 18 times its net income and 20 times its free cash flow result. Even if we assume a stable EBITDA of almost 900M CHF this year, the current enterprise value of the company (9.4B CHF including lease liabilities) still represents an EV/EBITDA multiple of 10.5.

However, given Callebaut's guidance to grow its EBIT by at least a mid-single digit from 2026 on, we could expect earnings to reach closer to 100 CHF per share by FY 2028. That still doesn't make the company cheap on an absolute basis, but the world leader in chocolate and chocolate ingredients will likely never get very cheap. In a previous article, I mentioned Barry Callebaut had the characteristics of a buy-and-hold forever company, and its share price has only gotten more attractive. I may be a buyer in the next few weeks.

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