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Imperial Sugar Company Analysis and Valuation

Imperial Sugar Company Analysis and Valuation. ACC712 Fall 2006 Chunlin Fan, Indah Isnarsi, Taro Nagao, Chanyuan Zhang (Sunny) December 6, 2006. Buy raw sugar cane, process and market refined sugar. Business Description. Products: granulated, powdered, liquid and brown sugar.

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Imperial Sugar Company Analysis and Valuation

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  1. Imperial Sugar CompanyAnalysis and Valuation ACC712 Fall 2006 Chunlin Fan,Indah Isnarsi,Taro Nagao,Chanyuan Zhang (Sunny) December 6, 2006

  2. Buy raw sugar cane, process and market refined sugar. Business Description • Products: granulated, powdered, liquid and brown sugar. • Own various brands (Dixie Crystals, Holly, Imperial), private labels. • Channels: • Grocery Stores (36% of Sales) • Industrial Manufacturers (49%) • Foodservice Distributors (15%) • Facilities located in Georgia and Louisiana. • Filed for bankruptcy protection in Jan 2001, emerged out in Aug 2001.

  3. Concentrate resources in high-margin branded products. Business Strategy 2005 Annual Report: “Through innovation that differentiates Imperial Sugar products and service, we are offering more than a commodity and competing on superior product attributes rather than price.” • Reduce supply of purely commodity products. • Sell-off non-refining operations to improve productivity.(e.g. Holly Sugar subsidiary in Sep 2005) = Product differentiation = Focus on the core

  4. Key Success Factors Key Success/Risk Factors • Management: heading in the right strategic direction. • Established relationship with buyers (incl. Wal-Mart). • Relatively stable and predictable end-user demand. • Strong balance sheet. Key Risk Factors • Susceptible to commodity price changes. • Difficult to differentiate, easy to imitate. • Overreliance on Southeast (e.g. Hurricane Katrina) • Dependence on government regulations.

  5. Financial statements are retroactively restated to exclude the operating results from the following discontinued operations: Accounting Analysis • Sale of Holly Sugar Co. ($51.1MM, FY05) • Sale of Three beet processing facilities ($34MM, FY03) • Sale of Diamond Crystal Brands foodservice business ($121MM, FY03) • Hurricane Katrina forced temporary closure of Louisiana plant, undermining FY05 results significantly (one-time item).

  6. Financial Analysis Advanced Dupont Analysis: • Net profit margin plunged in 2005 and gets better from 2006. • The asset turnover is increasing constantly due to increased productivity. • Leverage ratio is very low, leaving much flexibility to take more debt in future.

  7. Financial Analysis Time-Series Analysis: • NOA turnover and PP&E turnover increased constantly due to improved productivity. • Debt ratio reduced significantly in the last few years, leading to a stronger balance sheet. • Gross Margin has high volatility: after plunged in 2005, Imperial recorded a historical number in the first 9 months of 2006.

  8. Financial Analysis Cross-Section Analysis: • Gross margin of Imperial is still at the lower end of the industry. • NOA turnover is higher than the larger companies, which is due to the reconstruction of Imperial in the last few years. • ROE of 2006 is high because sugar price is record high.

  9. Forecasting for 2007 Revenue Forecasting Model: Revenue = Sugar Sales + By Product Sales + Other Revenue Sugar Sales = Industrial + Consumer + Food Service + World Imperial Sugar Market Share US Sugar Price US Sugar Consumption X X

  10. Forecasting for 2007 Revenue: US Sugar Consumption (000 short ton) • US sugar consumption increases 1.1% to 5.8 M short ton (See Chart) • Imperial Sugar market share: 15.4% for Industrial/Food Services and 10.2% for Consumer (as per Q3 2006) • Sugar price increases 0.2%1 to $34.32/cwt • Non-US Sales: 10% of domestic sales • By product: 1.9% of sugar sales • Other revenue: 0.4% of sugar sales • Revenue in 2007: $948M, increased by 1.1% compared to 2006 • Terminal growth rate: 1.7% Source: Sugar and Sweetener Outlook, USDA, Sept 2006 1 Based on forecasted sugar price increase in 2007 as published in 2006 Outlook of the US and World Sugar Markets 2005-2015, by Won K. Koo and Richard D. Taylor , Center of Agricultural Policy and Trade Studies, Department of Agribusiness and Applied Economics, North Dakota State University, August 2006

  11. COGS: Steady at 92% SG&A: Steady at 5.4% Depreciation: Steady at 10.8% Capital expenditure: $9.5M in 2007 as planned by management Forecasting for 2007 Costs:

  12. Last trade price: 22.44 (Dec 4) Market Cap: 253.50M Enterprise Value: 202.91M Price/Book: 1.57 Valuation Our Valuation: Key Market Data: • Risk free rate: 4.43% • Beta: 0.21 • Mkt risk Premium: 5.72% • Cost of equity: 5.63% Intrinsic Stock Price = $26.97 Sensitivity Analysis: Terminal Growth Rate Cost of Equity

  13. Valuation: Detailed Sensitivity Analysis

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