Watch the replay of this presentation below.
https://cdn.jwplayer.com/players/Lk9kfq4t-KY3o17gg.js
As we stated a few weeks ago in a note, we added UNFI to our LONG bench (NOTE HERE). Now, after doing more work we are very confident in the longevity of this company and as a result are upgrading it to a LONG. UNFI has been battered down this year by ~35% due to significant worries stemming from the loss of the Albertsons contract as well as the competitive landscape. Although increased competition (KeHE) and the potential of the captive systems are some of the biggest risks, we feel that this loss is an isolated incident and the company should not be penalized to this extent.
On August 20th, UNFI pre-announced 4Q15 and FY16 outlook and provided some positive color about the future for UNFI. Management provided positive commentary about the performance in the first two weeks of 1Q16, although only two weeks, it’s a marked sequential improvement and suggests that the core business remains strong. Following the loss of the Albertsons contract, the notion that UNFI will continue to lose customers is overblown and not very realistic in our minds. UNFI provides a value added proposition (a high level service to retailers), offering a wide variety of over 80,000 products at industry leading prices. The industry is seeing continued growth in natural & organic, specialty, ethnic gourmet and fresh, all of which UNFI offers and can package together to provide retailers great value.
Following the disappointing end to FY15 UNFI is in a great position to leverage the strong asset base it has built. Over the past two years, UNFI has gone through a period of significant investment in capacity to take advantage of the growth in the fresh, natural and organic market place. With this investment in the past, capex will be declining to more modest levels, about 0.6% - 0.7% of net sales. As a result, free cash flow is going to start to ramp up significantly and coupled with an underleveraged balance sheet M&A will become a bigger part of the story going forward.
The topics we will cover in today's presentation will be:
- The strong competitive position of UNFI
- The significant growth opportunity
- The strong financial position
- Our estimate of +40% upside in the name
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Howard Penney
Managing Director
Shayne Laidlaw
Analyst