BRRLY - Barry Callebaut Has The Characteristics Of A 'Buy And Hold Forever' Company

2023-04-13 10:30:00 ET

Summary

• Barry Callebaut is one of the largest companies in the worldwide chocolate industry.
• The stock has historically always been pretty expensive and is currently trading at just over 20 times this year's earnings expectations.
• Callebaut expects its EBIT to increase by 8-10% per year from next year on. This would result in an EPS north of 100 CHF/share by FY 2026.
• The free cash flow result is tracking the reported net income pretty well. This means the FCF yield will exceed 6% in FY2026.

Introduction

Barry Callebaut ( OTCPK:BYCBF ) ( OTCPK:BRRLY ) is one of the largest producers of chocolate and chocolate-related products in the world. This Swiss company operates almost 70 plants where it employs about 13,000 people taking care of the production process and the sales efforts to distribute the products in almost 150 countries all over the world.

Barry Callebaut is a Swiss company and its Swiss listing for sure is the most liquid. The ticker symbol in Switzerland is BARN and the average daily volume is approximately 9,500 shares. At a current share price of almost 2,000 CHF per share, the monetary value is almost 20M CHF. I will use the Swiss Franc as base currency throughout this article.

The first half of the current year started well

As the company’s financial year ends in August, Barry Callebaut recently released the financial results of the first half of its financial year. That semester ended in February, and Barry Callebaut was able to improve its margins.

The total revenue in the first half of the current financial year was 4.18B CHF which is an increase of approximately 3.7% compared to the first semester of the preceding financial year. As the COGS increased by just 2.7%, the gross profit came in almost 10% higher in the first half of 2023.

While that is great news, some of the other operating expenses did increase at a faster pace. The marketing and sales expenses increased by a double digit percentage while the G&A expenses increased by in excess of 7 to just over 231M CHF.

Despite all these elements and despite recording a lower ‘other income’, the EBIT increased by more than 5% to 348M CHF. The finance expenses barely changed in the first semester and this resulted in a pre-tax income of 288.2M CHF, an increase of almost 6% compared to the first half of the financial year 2022. The net income was 234.3M CHF but as this included a 1.2M CHF net loss attributable to minority interests, the underlying net income attributable to Barry Callebaut’s shareholders was 235.5M CHF. This worked out to just under 43 CHF per share.

Callebaut is able to convert the vast majority of its net income into actual free cash flow. Although the reported operating cash flow was a negative 102.5M CHF (see below), the company also recorded a 509M CHF investment in its working capital position. That being said, it also paid just 37.3M CHF in cash taxes versus the almost 54M CHF it owed based on the H1 income statement.

On an adjusted basis, the operating cash flow was 389M CHF. After deducting the 22M CHF in lease payments, the adjusted operating cash flow was approximately 367M CHF.

The image above shows the total capex was approximately 96M CHF and the combination of capex and lease payments (118M CHF) is pretty consistent with the 120M in depreciation and amortization expenses recorded during the first semester. The underlying free cash flow was approximately 271M CHF. That’s higher than the reported net income, mainly due to the fact the income statement contained a 38M CHF FX loss. As that’s a non-cash element, the cash flows are not impacted by this accounting loss.

This means the year has started well for Barry Callebaut and the company remains on track to meet its mid-term guidance. Between now and the end of FY 2026, Callebaut anticipates an annual volume growth of 4-6% which should result in an annual EBIT increase of 8-10% . As the EBIT in the first semester was 348M CHF, and considering seasonality isn’t a big factor here, we can likely expect the FY 2023 EBIT to come in at around 650-675M CHF. Using the lower end of that range and applying the lower end of the EBIT growth range, Barry Callebaut would end FY 2026 with an EBIT of 820M CHF. In the more optimistic scenario (using a 675M EBIT for this year and a 10% CAGR), the 2026 EBIT will come in at 900M CHF.

If we would use a result of 850M CHF and assume a 120M CHF annual interest expense, the pre-tax income will increase to 730M CHF. The effective tax rate has been around 17% in the past two years but I will use 19% going forward and this would result in a net income of 591M CHF or just under 110M CHF per share.

Investment thesis

Historically, Barry Callebaut has been trading at 25-30 times earnings which is quite rich even for a company with an anticipated high single digit growth rate. That being said, if Callebaut is indeed able to grow its EBIT by 8-10% per year for the next three years, the company is currently trading at just 17 times the anticipated earnings for 2026. That’s not unreasonable for one of the leaders in the sector and as the conversion ratio of the net income versus the free cash flow is close to 100%, perhaps a 6% free cash flow yield based on the anticipated 2026 results is not unreasonable either.

I currently have no position in Barry Callebaut but I will keep an eye on the company as it could very well be one of those ‘buy and hold forever’ companies.

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