Thursday 4 July 2013

Analysis of Orkla

A Norwegian conglomerat but mainly food

Company: Orkla

Business: A Norwegian company with several different business areas: Branded Consumer Goods, Orkla Foods, Orkla Confectionery & Snacks, Orkla Home & Personal, Orkla International, Orkla Food Ingredients, Jotun, Sapa (part of future JV), Sapa Heat Transfer, Hydro Power, Orkla Eiendom (real estate). One could say that they are spread out with what they are doing.
Active: Their main focus is the Nordic countries, Russia, India and Austria. Must be a challenge logistically to cover these areas.

P/E: 32.3

Also this company came from a request as can be seen here. I found this company to be very strange. They have made some serious changes with discontinued operations which have made them go from 60 billion NOK in revenue to around 30 billion. They have then also gone from around 8 billion in profit to less than 2 billion in profit. Which according to me should have made the stock drop by -75% but that just does not seem to have happened. Due to the discontinued operations I took their "recalculation" of revenue going back only three years instead of my standard five years. The question is according to which business are they valued? For sure not the energy or property part. By the look of it also not the food part because just take a look at the P/E valuation of Wal-Mart or Tesco.

The P/E is far, far too high with over 32 and the price to book is acceptable at 1.5 but combine the two according to Graham and it is a very clear no go! The earnings to sales are looking like other food/retail companies with around 5%. The book to debt is very good with a ratio of 2.4. The growth discounting the discontinued operations for the last three years has been a poor 0.4% and this leads to a motivated P/E of 7-9 which means that the stock is more than three times as expensive as it should be. They pay out a very nice dividend of almost 5% however this represents 160% of their total earnings which means they can not keep that up. By the look of it they kept the "old" dividends that they could pay out when they had 60 billion in revenue and made 8 billion NOK in profit. Those days seem to be gone! I find this company to be very strange. I really wonder what happened there and why the stock price is so high as it is. I must have missed something substantial during my analysis of the company.

Conclusion: I would not buy Orkla! In my opinion this company is highly overvalued on the Norwegian stock exchange.

Does anyone know why it has such as crazy P/E? And why did they drop to half revenue?


Sascha said...
This comment has been removed by a blog administrator.
Fredrik von Oberhausen said...

There was a comment here from Sascha that I unfortunately had to remove since it lead to a page that forced people to sign up.

What could be read before signing up was so useless that it serves no one which lead to me deleting the comment.

The comment Sascha brought up however which looking back I should have copy/pasted before deleting his comment was that I should have removed goodwill and non-occurring costs etc. before making my analysis of the company.

As I have written in articles before I will handle every company exactly the same with no exceptions and no special rules due to that the company I analyse belongs to a certain industry.

That is not my way.

If you want to adjust your calculations to make it into a good investment then please do so on your own. I am sure that with my contrarian approach I can find enough good investments without special adaptation.

Please Sascha next time do not add links that does not go directly to what you want to show.