Drosed talks with investors, broker recommends 'buy'
The company appears to be charting a course in both directions.
Last week, CDM Pekao Securities brokerage publicly released a 'buy' recommendation for Drosed, citing the company's attractiveness as a takeover candidate by a foreign strategic investor.
"Drosed is being traded below our valuation," CDM Pekao wrote in its recommendation, dated July 29, but only released to the press last week. CDM valued Drosed at zł. 50 a share based on discounted cash flow, the brokerage said. Drosed was trading in the mid-zł. 40 range early last week.
"In our opinion, a strategic investor taking over control of a company that is a leader in the poultry industry can pay even 15-20% more," CDM said.
Such an investor could put out a call for stock causing shares to rise to reach zł. 55-zł. 60, according to the brokerage. "Hence, our recommendation to buy Drosed stock," CDM said.
Drosed said last week it was talking with potential investors to build export markets, but would not disclose to which companies it was talking.
"It's difficult (to say) which one will stay," said Stanisław Skora, Drosed's economic director.
Drosed is looking for investors from the sector to build synergies with other markets, especially the European Union (EU), Skora said. "Such an investor can give us new markets and distribution networks and that's very important. Also there is a tendency around the world toward consolidation, that's why in our opinion it would be better."
Drosed is showing relatively strong sales and maintaining profitability when other fresh and processed poultry producers are reporting downturns and losses, analysts said.
Drosed's sales grew 12% during the first five months this year compared to the same period last year. While that falls well short of last year's 16% growth rate, Drosed improved sales at a time when the sector was under pressure from the closure of the Russian market and increased competition at home.
Drosed's net profit, however, continues to slide. Net profit during the first five months was zł. 1.32 million ($339,000) compared to zł. 1.36 million ($388,571) in 1998. On a yearly basis, the company reported zł. 3.32 million ($949,000) net profit in 1998 on zł. 3.03 billion ($866 million) in revenue. That compares with net profit of zł. 3.53 million ($1.1 million) on revenue of zł. 2.62 billion ($819 million) in 1997.
Drosed is quick to note that last year sales were up and the profit slump was not due to operations. Profit from operations grew about 22% over 1997 levels and operating margins, a measure of core business efficiency, improved from 2.96% in 1997 to 3.13% last year. Based on the profit/loss statement for 1998, the profit drop last year was due mainly to tax charges.
But operating profit through May rose only 11%, or half of last year's rate, and the operating margin slipped by to 2.68% for the first five months of this year. Skora attributed the change to the downturn in the Russian market and seasonal fluctuations.
"The first half of the year we still felt the effects of the Russian crisis, even though we don't have large exports," Skora said. "Also we are a large producer of canned goods. The sale of these assortments is higher in the second and third quarter. That also will improve significantly the operating margins."
Concerning net profit this year, Skora said Drosed does not issue forecasts, and he dismissed a recently published net profit forecast zł. 2.66 million ($682 million), which was published in daily Parkiet.
"That's a little too low," Skora said. "We already have zł. 2.2 million for the first half year. Last year was zł. 3 million. This year will be better than last."
The Russian crisis not only meant a loss of export sales but also brought downward pressure on prices as food producers flooded the market here, analysts said.
"There are signs that each company is facing a fall in sales," said Bogna Sikorska, an analyst with CDM Pekao Securities. "In such a difficult year, the fact that they have an increase in sales (above) 10% is really a big deal."
Drosed is pursuing a strategy of economies of scale to offset the squeeze on profits from falling prices. It is also trying to increase its market share. In May this year the company paid zł. 8 million ($2.05 million) for a 75% stake in Roldrob, a poultry processor in Tomaszow. "They did not overpay," Sikorska said.
Drosed is also upgrading its processing plant in Toruń to increase capacity and quality of production, the company said. Drosed produces fresh, frozen and canned poultry products and sells more than 90% of them domestically through local market and national hypermarket chains and fast food outlets, such as Kentucky Fried Chicken and McDonald's.
In addition to the recent glut on the market, Drosed faces ongoing consolidation that could significantly change the poultry landscape, analysts said. Drosed currently boasts 18% of the poultry market after the Roldrob purchase, according to the company.
"Drosed is decidedly the leader in that market," Sikorska said. "It will play a very big role in the consolidation process."
But Drosed is not the only player. The privatization of Drobimex-Heintz, Drosed's major competitor, has been an on-again, off-again affair for two years. Analysts are anticipating that the sale of the Szczecin-based producer will take place this year, which could signal the strengthening of a major player and a shake up in the poultry sector. "Maybe wider scale consolidation of the poultry market will start later this year," Sikorska said. "The stimulus will be the privatization of Drobimex-Heintz."
Other, smaller players include companies such as Cedrob and Indykpol's poultry subsidiary Ludrob in addition to numerous smaller, local producers. Consolidation is possible among these producers, especially with deep-pocketed foreign backers such as Hudson Foods, which took a 30% stake in Cedrob for $3 million as part of a $10 million overall investment into the company, according to official figures.
In addition to plants in Siedlce and Toruń and the recent Roldrob purchase, Drosed has had plans to build a new factory to increase production capacity and sweep up more market share. But these plans have been put off until 2001, said Sikorska of CDM Pekao.
"They keep moving plans back year to year," Sikorska said. "They might need a strategic investor first. They might not have enough money to handle such a building project."
Drosed also plans an expensive upgrade to its Siedlce plant, Skora said.
"It's not a foregone conclusion how we will finance the investment, whether it will be a share issue or be other means of financing," Skora said. "There are different options. One of the options is that that a strategic investor will finance the building."
Last week, CDM Pekao Securities brokerage publicly released a 'buy' recommendation for Drosed, citing the company's attractiveness as a takeover candidate by a foreign strategic investor.
"Drosed is being traded below our valuation," CDM Pekao wrote in its recommendation, dated July 29, but only released to the press last week. CDM valued Drosed at zł. 50 a share based on discounted cash flow, the brokerage said. Drosed was trading in the mid-zł. 40 range early last week.
"In our opinion, a strategic investor taking over control of a company that is a leader in the poultry industry can pay even 15-20% more," CDM said.
Such an investor could put out a call for stock causing shares to rise to reach zł. 55-zł. 60, according to the brokerage. "Hence, our recommendation to buy Drosed stock," CDM said.
Drosed said last week it was talking with potential investors to build export markets, but would not disclose to which companies it was talking.
"It's difficult (to say) which one will stay," said Stanisław Skora, Drosed's economic director.
Drosed is looking for investors from the sector to build synergies with other markets, especially the European Union (EU), Skora said. "Such an investor can give us new markets and distribution networks and that's very important. Also there is a tendency around the world toward consolidation, that's why in our opinion it would be better."
Drosed is showing relatively strong sales and maintaining profitability when other fresh and processed poultry producers are reporting downturns and losses, analysts said.
Drosed's sales grew 12% during the first five months this year compared to the same period last year. While that falls well short of last year's 16% growth rate, Drosed improved sales at a time when the sector was under pressure from the closure of the Russian market and increased competition at home.
Drosed's net profit, however, continues to slide. Net profit during the first five months was zł. 1.32 million ($339,000) compared to zł. 1.36 million ($388,571) in 1998. On a yearly basis, the company reported zł. 3.32 million ($949,000) net profit in 1998 on zł. 3.03 billion ($866 million) in revenue. That compares with net profit of zł. 3.53 million ($1.1 million) on revenue of zł. 2.62 billion ($819 million) in 1997.
Drosed is quick to note that last year sales were up and the profit slump was not due to operations. Profit from operations grew about 22% over 1997 levels and operating margins, a measure of core business efficiency, improved from 2.96% in 1997 to 3.13% last year. Based on the profit/loss statement for 1998, the profit drop last year was due mainly to tax charges.
But operating profit through May rose only 11%, or half of last year's rate, and the operating margin slipped by to 2.68% for the first five months of this year. Skora attributed the change to the downturn in the Russian market and seasonal fluctuations.
"The first half of the year we still felt the effects of the Russian crisis, even though we don't have large exports," Skora said. "Also we are a large producer of canned goods. The sale of these assortments is higher in the second and third quarter. That also will improve significantly the operating margins."
Concerning net profit this year, Skora said Drosed does not issue forecasts, and he dismissed a recently published net profit forecast zł. 2.66 million ($682 million), which was published in daily Parkiet.
"That's a little too low," Skora said. "We already have zł. 2.2 million for the first half year. Last year was zł. 3 million. This year will be better than last."
The Russian crisis not only meant a loss of export sales but also brought downward pressure on prices as food producers flooded the market here, analysts said.
"There are signs that each company is facing a fall in sales," said Bogna Sikorska, an analyst with CDM Pekao Securities. "In such a difficult year, the fact that they have an increase in sales (above) 10% is really a big deal."
Drosed is pursuing a strategy of economies of scale to offset the squeeze on profits from falling prices. It is also trying to increase its market share. In May this year the company paid zł. 8 million ($2.05 million) for a 75% stake in Roldrob, a poultry processor in Tomaszow. "They did not overpay," Sikorska said.
Drosed is also upgrading its processing plant in Toruń to increase capacity and quality of production, the company said. Drosed produces fresh, frozen and canned poultry products and sells more than 90% of them domestically through local market and national hypermarket chains and fast food outlets, such as Kentucky Fried Chicken and McDonald's.
In addition to the recent glut on the market, Drosed faces ongoing consolidation that could significantly change the poultry landscape, analysts said. Drosed currently boasts 18% of the poultry market after the Roldrob purchase, according to the company.
"Drosed is decidedly the leader in that market," Sikorska said. "It will play a very big role in the consolidation process."
But Drosed is not the only player. The privatization of Drobimex-Heintz, Drosed's major competitor, has been an on-again, off-again affair for two years. Analysts are anticipating that the sale of the Szczecin-based producer will take place this year, which could signal the strengthening of a major player and a shake up in the poultry sector. "Maybe wider scale consolidation of the poultry market will start later this year," Sikorska said. "The stimulus will be the privatization of Drobimex-Heintz."
Other, smaller players include companies such as Cedrob and Indykpol's poultry subsidiary Ludrob in addition to numerous smaller, local producers. Consolidation is possible among these producers, especially with deep-pocketed foreign backers such as Hudson Foods, which took a 30% stake in Cedrob for $3 million as part of a $10 million overall investment into the company, according to official figures.
In addition to plants in Siedlce and Toruń and the recent Roldrob purchase, Drosed has had plans to build a new factory to increase production capacity and sweep up more market share. But these plans have been put off until 2001, said Sikorska of CDM Pekao.
"They keep moving plans back year to year," Sikorska said. "They might need a strategic investor first. They might not have enough money to handle such a building project."
Drosed also plans an expensive upgrade to its Siedlce plant, Skora said.
"It's not a foregone conclusion how we will finance the investment, whether it will be a share issue or be other means of financing," Skora said. "There are different options. One of the options is that that a strategic investor will finance the building."
