Long Hain Celestial

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Rating Buy Current Price 62.90 Target Price in One Year 72.59 (15.41% Upside) Company Hain Celestial U.S. Exchange Ticker New York Nasdaq HAIN Why Should We Invest in Organic Food Industry? We see a strong sales growth in the U.S. markets. Throughout the past two decades, the consumer demand for organically produced goods has been increasing dramatically with CAGR of 12.2%. According to recent industry statistics, organic sales have expanded in all food categories since 2005, which account for over 4 percent of total U.S. food sales. In the coming years, industry revenue is expected to grow further as the result of several economic factors. Firstly, the U.S. economy continues to recover from the previous financial crisis, indicating that the disposable income of American families is projected to increase over the next five years. Secondly, the Consumer Confidence Index (CCI) reaching the highest level since 2007 may change their diet choices. The shift in consumer attitudes and purchasing behavior suggests that consumers now show more concerns regarding health, environment, and animal welfare, all of which are demonstrated in the fundamental values of organic food. Customers are concerned about risks of more industrialized food such as GMO. Currently there are intensive debates on the effects of genetically modified organisms (GMOs) on health and the environment as well as whether GM food in the U.S. should be labeled. Numerous scientists point out that no long-term studies have ever been conducted to confirm the safety of GMO use. McDonald's, the world's largest fast-food company and a longtime buyer of Simplot potatoes for french fries, refused to continue buying Simplot's latest GMO, the Innate potato. As a result, organic food has become an excellent alternative to GMO and other non-organic food. Organic products have become more accessible. The natural food retail chains are now expanding in an unprecedented level due to the rising consumer demand for organic foods. Whole Foods Market, for example, specializing in natural and organic foods, the company owns about 50 brands and sells 5,000 products around the world. As retail channels become more and more diverse, consumers could gain more access to all kinds of organic products. Hain Celestial (HAIN) will maintain high sales growth with its long-term strategy in acquisitions and an optimistic organic food industry outlook. Even though it is trading close to 52-week high, its diversified portfolio of brands and constant product innovation indicate a significant upside. U.S. Organic Food Sales Growth and Consumer Confidence Index (in billions) Source: USDA&UWMadison Number of Whole Foods Stores Source: Seeking Alpha Hain Celestial: Organic Products Leader and Entrepreneur with Strong Growth Momentum Bull 81.46 Base 72.59 Bear 65.38 Stock Price

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Transcript of Long Hain Celestial

Page 1: Long Hain Celestial

Rating!

Buy!!Current Price!62.90!!Target Price in One Year!72.59 (15.41% Upside)

Company!

Hain Celestial !!!!U.S. Exchange Ticker!New York Nasdaq HAIN

Why Should We Invest in Organic Food Industry? !We see a strong sales growth in the U.S. markets. Throughout the past two decades, the consumer demand for organically produced goods has been increasing dramatically with CAGR of 12.2%. According to recent industry statistics, organic sales have expanded in all food categories since 2005, which account for over 4 percent of total U.S. food sales. In the coming years, industry revenue is expected to grow further as the result of several economic factors. Firstly, the U.S. economy continues to recover from the previous financial crisis, indicating that the disposable income of American families is projected to increase over the next five years. Secondly, the Consumer Confidence Index (CCI) reaching the highest level since 2007 may change their diet choices. The shift in consumer attitudes and purchasing behavior suggests that consumers now show more concerns regarding health, environment, and animal welfare, all of which are demonstrated in the fundamental values of organic food. !Customers are concerned about risks of more industrialized food such as GMO. Currently there are intensive debates on the effects of genetically modified organisms (GMOs) on health and the environment as well as whether GM food in the U.S. should be labeled. Numerous scientists point out that no long-term studies have ever been conducted to confirm the safety of GMO use. McDonald's, the world's largest fast-food company and a longtime buyer of Simplot potatoes for french fries, refused to continue buying Simplot's latest GMO, the Innate potato. As a result, organic food has become an excellent alternative to GMO and other non-organic food. !Organic products have become more accessible. The natural food retail chains are now expanding in an unprecedented level due to the rising consumer demand for organic foods. Whole Foods Market, for example, specializing in natural and organic foods, the company owns about 50 brands and sells 5,000 products around the world. As retail channels become more and more diverse, consumers could gain more access to all kinds of organic products.

Hain Celestial (HAIN) will maintain high sales growth with its long-term strategy in acquisitions and an optimistic organic food industry outlook. Even though it is trading close to 52-week high, its diversified portfolio of brands and constant product innovation indicate a significant upside.

U.S. Organic Food Sales Growth !and Consumer Confidence Index! (in billions)

Source: USDA&UWMadison

Number of Whole Foods Stores

Source: Seeking Alpha

Hain Celestial: Organic Products Leader and !Entrepreneur with Strong Growth Momentum

Bull 81.46

Base 72.59

Bear 65.38

Stock Price

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Why Should We Pick Hain Celestial among a Sea of Organic Foods Producers? !Hain owns the most diverse set of organic product portfolio by frequent acquisitions. Compared to its peers such as General Mills and WhiteWave Foods, Hain owns the largest number of brands by constantly acquiring organic food producers throughout the years and adding them to its product mix. With its 40 plus brands, Hain’s products cover 10 of the 15 highest penetration categories across organic and natural industry. Along with its impressive brand quantity, Hain owns several giants in the organic goods space. Its top performing company is Earth’s Best, which makes organic food products for infants, toddlers and children. Earth's Best has 2.6 percent of the market share. !Hain has a strong global expansion momentum. Its products are sold to customers in more than 65 countries. International sales have been continuously growing in the past three fiscal years. Its business in both U.S. and U.K. posted record sales. It has also forged a partnership with Hutchison Whampoa Limited, billionaire Li Ka Shing’s retail and financial colossus, to take on Chinese market and other emerging markets such as Thailand, Indonesia and Vietnam. !Hain is led by an entrepreneurial and visionary CEO. Irwin Simon is the founder of Hain and has been the CEO for 21 years since 1993. After his exit from Slim-Fast, the weight-loss company, Irwin Simon decided to build his own business based on natural and healthy food at a time when going organic meant someone had to be weird. He is also a rampant consolidator, having bought three-dozen companies in 20 years. He eats his own merchandise, and eating well is part of his life.

Hain makes its products accessible to customers with different economic status. Thanks to the expansion of organic good retailers such as Whole Foods, Hain is seeing a rapid growth in recent years. That being said, Hain products are also in demand by Costco, Wal-Mart and other mass-market grocers, allowing Hain to expand its sale channels and increase the accessibility of its products.

!Why Should We Invest in Hain Now? !Hain is still improving its M&A environment by recent and future acquisitions of international and local companies. 1. Tilda. Hain finished its acquisition of British rice company Tilda for $357

million last year. Given Tilda’s international presence, this acquisition provides Hain a tremendous platform to expand into faster-growth markets such as India and the Middle East. Hain also plans to foster growth of the Tilda business by expanding the iconic Basmati rice brand in the U.S., where it generates just 2.5% of sales. We believe that the growth will benefit FY16E sales numbers.

2. Empire Kosher Poultry. Hain announced in early March that it had purchased the remaining 80% of Empire Kosher Poultry’s parent corporation, for $57.6 million as a strategic acquisition. As a leader of selling kosher brands at outlets in the U.S., Empire will provide Hain with the opportunity to broaden its existing portfolio of organic and natural brands into healthier kosher products.

2014 Sales Divided by Products

International Sales Representation in Net Global Sales

Source: 10K

Source: 10K

Irwin Simon Source: Google

Source: Google

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!!Hain has committed to higher level of corporate social responsibility to better public relations and to improve company image. Hain recently announced a three-year charitable commitment to CARE(R), a leading humanitarian organization that fights global poverty. With this commitment, three of Hain’s personal care brands have been named the founding partners to the “Empower Her through Education” campaign, a multi-brand movement dedicated to eliminating barriers to education for young women in developing countries. The partnership could largely raise the reputation and value of Hain’s brands by allowing consumers to relate organic and natural products to the concept of healthier life. !Hain is actively involved in product innovation and penetration to e-commerce. In order to open up broader growth channels, Hain is investing in products with digital initiatives and e-commerce platforms that exemplify high standards for quality. During the Natural Products Expo West 2015, over 100 new products of Hain were featured. These brands and the new product innovation demonstrate Hain’s continued leadership in the organic and natural space.

What are the Risks Associated with this Investment? !Organic foods market is highly competitive. No single organic food brand owns a market share more than 5%, and there is uncertainty that Hain would outperform some multinational competitors with larger scales and greater resources. To survive and grow in this competitive market, Hain has been expanding its market presence by acquiring other established organic food producers and integrating the brands to create synergies. Hain now owns the largest number of brands in the market.

Hain Celestial may fail to expand its business through acquisitions. Frequent acquisition and the fact that its portfolio consists of a large amount of brands may divert management team from daily operation and increase the likelihood of miscommunication regarding operational decision-making. In reaction to the potential management inefficiency due to frequent acquisitions, Hain invites the executive members of acquired companies joining Hain’s senior management team. In its 2014 acquisitions, Hain invited the Tilda team led by Rohit Samani to Hain Celestial United Kingdom and the Rudi’s Organic Bakery team to Hain Celestial United States. !Hain is subject to foreign currency risks associated with its international sales. The expectation of Federal Reserve to raise interest rates in mid 2015 leads to the strongest U.S. dollar in a decade. Dollar appreciation may cause its products to become less attractive in foreign markets. However, foreign currency risks will not become a major concern when making long term investment decision because global economy is unpredictable. Furthermore, dollar will regain its stability after Federal Reserve set forth its monetary policy and the effect of exchange rate changes on cash only impacted less than 4% of FY2014 cash net change and less than 0.01% of revenue.

Strongest USD in a Decade

Source: Investing.com

Source: Google

A Highly Competitive Industry

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Comparables Analysis Details

Valuation !!Discounted Cash Flow Analysis Summary

Bear Base Bull

Sales Growth (%) 12.50% 15.50% 18.50%

COGS (% of Sales) 73.63% 73.63% 73.63%

SG&A (% of Sales) 14.44% 14.44% 14.44%

Effective Tax Rate 30.00% 30.00% 30.00%

Perpetual Growth Rate 2.75% 3.00% 3.25%

WACC 6.52% 6.52% 6.52%

Implied Share Price 61.80 76.23 93.96

Financial Discussion

• Even if Hain trades at higher multiples in the overall food industry, its multiple is reasonable compared to other organic food companies such as WhiteWave

• EBITDA multiple is preferred because it reflects Hain’s operational performance and organic growth

• Acquisition expense is excluded from CapEx and thus projected sales growth is lowered to 15.5% from 24% sales growth in the trailing 3 years to factor out acquisition contribution accordingly

• The target price of 72.59 is the average of DCF base case price and median EBITDA multiple price

2012 2013 2014 2015 2016 2017 2018 2019

Sales 1,378.00 1,735.00 2,154.00 2,487.87 2,873.49 3,318.88 3,833.31 4,427.47

COGS 996.00 1,260.00 1,586.00 1,831.83 2,115.76 2,443.71 2,822.48 3,259.97

Gross Profit 382.00 475.00 568.00 656.04 757.73 875.17 1,010.83 1,167.50

SG&A 230.00 275.00 311.00 359.21 414.88 479.19 553.46 639.25

EBITDA 152.00 200.00 257.00 296.84 342.84 395.99 457.36 528.25

% Margin 11.03% 11.53% 11.93% 11.93% 11.93% 11.93% 11.93% 11.93%

Less: Depreciation & Amortization 1.40 26.00 28.00 28.00 28.00 28.00 28.00 28.00

EBIT 150.60 174.00 229.00 268.84 314.84 367.99 429.36 500.25

% Margin 10.93% 10.03% 10.63% 10.81% 10.96% 11.09% 11.20% 11.30%

Less: Interest 17.30 20.49 20.14 20.14 20.14 20.14 20.14 20.14

Less: Taxes 41.15 34.32 70.10 74.61 88.41 104.35 122.77 144.03

Net Income 92.15 119.19 138.76 174.08 206.29 243.49 286.45 336.08

Plus: Depreciation & Amortization 1.40 26.00 28.00 28.00 28.00 28.00 28.00 28.00

Less: Capital Expenditures 20.43 72.88 41.61 41.61 41.61 41.61 41.61 41.61

Less: Change in Working Capital 0.33 (47.11) (11.35) (11.35) (11.35) (11.35) (11.35) (11.35)

Unlevered Free Cash Flow 72.78 119.42 136.50 171.83 204.03 241.23 284.20 333.82

Historical Year Projected Year

Discounted Cash Flow Analysis (Base) Details

Market Cap ($bn) EBITDA ($mm) Price / Earnings (x) EV / EBITDA (x)3/13/2015 LTM LTM LTM

General Mills, Inc. GIS 32.17 3,496.10 20.3 13.9Kraft Foods Group, Inc. KRFT 36.25 2,384.00 35.4 18.9The WhiteWave Foods Company WWAV 7.28 254.55 52.9 22.6Treehouse Foods, Inc. THS 3.62 366.69 38.0 13.7Median 36.7 16.4Mean 36.6 17.3The Hain Celestial Group, Inc. HAIN 6.38 288.34 43.8 25.3

15.38 15.88 16.38 16.88 17.38Implied EV 6844.10 7066.60 7289.10 7511.60 7734.10Implied Market Cap 6568.10 6790.60 7013.10 7235.60 7458.10Implied Share Price 64.57 66.76 68.95 71.13 73.32

EBITDA Multiples

Company Name Ticker