Viscofan is one of the most known companies in the Spanish investment industry. The firm operates in the global casings industry, in which it is the absolute leader since is the only company producing all the available artificial casing technologies (collagen, plastic, cellulose and fibrous). Besides being the leader and the biggest company in the industry, this fact allows the company to have a huge competitive advantage with respect to its competitors.
So that, Viscofan’s moat is based on its ability to sell a wide range of products to each customer, removing their cost of dealing with different suppliers. The casings market has become very competitive, with various global competitors such as Devro, Kalle, Viskase or Kalle. While the main competitors have reduced its profitability ratios, Viscofan has managed to increase its operating margin (21% in 2016) and maintain its return on capital in levels above 20% (pre-tax). In addition, Viscofan is the only main player who has increased its revenue and operating profit since 2011.
The market is expected to grow in the following years, with three key drivers: i) the number of people living in urban areas is growing, ii) meat consumption per capita is increasing, and iii) artificial casings are replacing natural animal gut casings. Therefore, although profit margins can decline even more, the global trend in the market is positive, with an expected growth rate for the sector of 3-5%.
Viscofan is an example of a value-generating company. Since 2005, revenues have grown at a 4% annualized rate, while operating profit and shareholders’ equity have grown at a 10-11% rate. However, the most notorious growth rate is dividends per share, with a compound annual growth rate of 22% in the last 5 years. In addition, it is worth mentioning that the number of shares has slightly decreased in the last decade, so all growth has been generated without new equity emissions.
Furthermore, as we have mentioned above, the crown jewel of Viscofan is its profitability. The post-tax return on capital is between 16-28%, and operating profit is above 20% and increasing in the last years, while the peers are showing a negative trend. This shows that Viscofan is a robust company with the ability to survive in stressful situations and market pressures.
The annual free cash flow generated by Viscofan is around €70 million, although it is volatile due to capital expenditures. The net operating profit after taxes (NOPAT), which is post-tax operating profits, is €125m and shows a long-term positive and sustainable trend.
This cash flow generating capacity allows Viscofan to operate with almost no debt, that has been reducing in absolute and relative terms in the last decade. Current financial net debt (considering cash and financial assets) is around €26 million against €130 million in 2008. The relationship between net debt and EBITDA shows the same pattern. Net debt to EBITDA has been reduced from a level of 1.5x in 2005 to a current level of 0.1x, despite the constant and recurrent increase in dividend payments.
Since 2006 until 2017, the return given by the share of Viscofan has been 463%, while the total return, including dividends, has been 649%. The total CAGR 2003-2017, therefore, is 15.5%, with an average dividend yield of 2.9%. So that, this is one of those companies in which the magic of compound interest shows up.
In summary, as I showed in a previous analysis, Viscofan is a high-quality company, with a wide moat and positive long-term perspectives, despite the increasing competition in the market. The management is long-term oriented, and the financials are robust. The next step, therefore, is estimating the intrinsic value of the company applying the discounted cash flow methodology and the multiples approach, so that we can compare the price to value, which, in the end, is all that matters.