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Abrau Durso – 48% upside with "Champagne"

Date: 08 Jun 2012

Abrau Durso (JSC Abrau Durso, MICEX:ABRD) started to trade at MICEX-RTS on 11 April 2012 to "test" investor interest. So, let's test our interest.

The intrigue of the stock is that it's very cheap comparable to multiples from other emerging markets… except Russia.

EV/2011E EBITDA = 5.9x

What about DCF valuation?

My target price is 8,167 RUB which is 48% to 08.06.2012 close price at 5,501 RUB.

1. Russian Vine Market and Revenue

We will use the following model: Revenue = Volume * Price

Assumed macro context: slowdown of Russian GDP growth from ~7% in 2001-2007 to ~4% in 2011-2016

1.1 Russian sparkling vine market

In April 2012 presentation the company makes the claim that wine market in Russia will grow fast to catch up with European penetration. I don't support this.

Is there potential fast growth in vine consumption in Russia? No, but there is potential upside

The claims that it would grow with GDP to catch up with developed European countries is questionable:

In the last 5 years (since 2006) it grew 6.5% p.a.
US has even lower consumption: 8.8 vs. 9.3 in Russia

A lot of researchers assume an upside which is a good upside to have for a stock. This is one of the best papers on the topic: http://www.sostav.ru/articles/2003/02/03/prod030203/

Is there potential fast growth in penetration of sparkling vines to vine market? No

1) Russia already has the 2nd highest penetration among ~50 top countries.
2) Penetration of sparkling vines to wines showed no particular trend since 2006

So, expected growth of Russian sparkling wine market is well defined by its history: 2.2%

1.2 Abrau Durso Market share

Abrau Durso was aggressively gaining market share in 2008, 2010, 2011. Loss of market share in 2009 is well explained with 31% price increase vs. 17% CAGR in 2006-2008 and 14% CAGR in 2009-2011

The company didn't do any acquisition in 2009-2010 of production assets: the only acquisition was the following: "On 22 May 2009 the Group acquired 100% of the trading company LLC Atrium with the aim to create the distribution network within the Group."

I believe that the company will continue market share growth at 13% rate (CAGR 2006-2011): with 2011 market share of 4.9% there is enough space to grow.

1.3 Abrau Durso Price increase

Price increase was the biggest driver of revenue in Abrau Durso business model: prices grew at 18.6% CAGR in 2006-2011.

Part of this price increase was driven by growing penetration of the more expensive Classical champaign: it contributed 2.5% to price CAGR in 2009-2011. This contribution is forecasted to decrease to 1.3% in 2011-2014.

Note: there is an inconsistency in share of classical champaign at page 15 of the presentation and operational report (http://abraudurso.ru/upload/news/OperateReport5th.xls)

Price CAGR decreased from 17% before 2008 crisis to 14% after (-3% change). It's defined by several effects: inflation, duties, currency rates and share of imported vs. local wines. The last one is hard to take into account due to lack of data.

I would expect price growth to experience the same slowdown in the coming years due to increased competition.

Price CAGR forecast 2011-2016: 10% (11% rate before taking into account effect of slower growth of Classical champaign or 10% after)

1.4 Revenue forecast

Volume growth: 2% + 13% = 15%
Price growth: 10%
Revenue growth: 25%

Company's forecast: 34m bottles in 2015, which is 21% CAGR

2. EBITDA

In 2010 Gross Margin showed improvement, but SG&A increased due to G&A expenses growth. In 2011 EBITDA margin increased on 5.3% which is quite big and is potentially caused by preparation to IPO. Unfortunately there is no explanation for this change. Also, 2011 EBITDA margin is already on high levels – 32.6%.

To base projections on 2009-2010 data where all costs splits are provided, it's assumed:

2012 EBITDA at average between 2010 and 2011
2013-2016 EBITDA decreases on 1% p.a.

3. FCF

3.1 Working capital (WC)

The company showed good progress in 2010 vs. 2011 in improving its working capital components. Remy Cointreau shows that turnover of Receivables and Payables can achieve much more attractive levels.

WC projections assume 1% p.a. decrease in Inventories + Receivables turnover as % of revenue and 1% p.a. increase in Trade and other payables turnover as % of COGS.

3.2 CAPEX

2010 CAPEX as % of next year revenue change is 22%. For CAPEX forecast 30% is used.

4. DCF Valuation

IFRS report is available only for 2010, and debt and cash are given at the end for 2010. So all valuation will be done for the end of 2011, including FCFF for 2011 at 0% discount rate.

4.1 Acquisition of CJSC Abrau-Durso

One of the biggest complications of DCF valuation is acquisition of 41.2% of CJSC Abrau Durso on 22.07.2011 (http://www.e-disclosure.ru/portal/event.aspx?EventId=lVzZvlVYn0a0VuIkxKrhKQ-B-B).

"As a result of this transaction the Group’s share in CJSC "Abrau-Durso", JSC "Wine atelier Abrau-Durso", Fund for the revival of traditions of winemaking "Heritage of Abrau-Durso", "Service Abrau-Durso Limited", LLC "Abrau-Durso territory", Vine Yards Abrau-Durso Limited, LLC Abrau-Durso Public Utilities, CJSC Vino ER EF, LLC Center of Wine Tourism Abrau-Durso increased to 100%."

According to the prospect dated 18.11.2011, the company owns 99.999%-100% in all dependent companies. As no major M&A transactions happened since that time non-controlling interest is effectively 0 as of now. How to value this non-controlling interest at the end of 2010? To answer this question let's see how that deal was financed:

According to rumors 41.2% were purchased at 500m RUB (http://foodmonitor.ru/drinks/2009-09-21-10-19-45/5515-2011-09-02-05-43-03.html)
They were financed by 412m RUB loan which appeared in 2011 and can be seen in JSC 2011 report based on Russian accounting standards. It indirectly confirms acquisition price.

It's hard to track the whole deal and the following approach was used: market value of minority interest is 500 m RUB.

4.2 DCF Valuation

5. Conclusion

At current assumptions upside is 48%. Together with comparables valuation (EV/EBITDA 2011E at 5.3x vs. 8.4x in developed and 14.1x in developing markets) this makes the stock very attractive.

Upsides

Faster growth of sparkling wine market, market share or prices
No decline in EBITDA
Improvements in WC turnover
(tactical) Release of more information before IPO in 2012/2013 will make the analyzed attractiveness of the stock more clear and will increase investor demand

Risks

Tightened legislation, including increased excise taxes
Decrease in WC turnover
Growth of COGS

It's worth pointing out that 2% faster revenue growth in 2012-2016 (I assumed 15% volume CAGR while the company assumed 21%) and no 1% annual decline in EBITDA means 105% upside.

Tags: Abrau Durso, BRIC, Russia, Stocks - fundamental analysis, ОАО «Абрау-Дюрсо»