Viscofan (VSCFF): I’m Expecting A High-Single Digit EBITDA Growth In The Next Two Years

Introduction

It’s been several years since I last had a look at Viscofan (OTC:VSCFF), the Spanish company and leading producer of casings for meat products. As the demand for Viscofan’s products is relatively high and stable, the company is trading at a premium valuation and in this article I wanted to have a closer look to see whether or not it makes sense to initiate a long position in the Spanish company as I wasn’t bullish back in 2019. The share price is currently up by approximately 40% in the past five-year time span.

Viscofan is a Spanish company and its most liquid listing is in Madrid where the ticker symbol is VIS, and the average daily volume is approximately 46,000 shares. The current market capitalization is approximately 2.75B EUR. I will use the Euro as base currency throughout this article.

A look back at 2023 – tax benefits saved the day

Before discussing the recently published Q1 results, I wanted to have a look at the company’s financial results in 2023 as that will provide more context and a platform for the company to build on.

The total revenue in 2023 was 1.23B EUR, an increase of approximately 2% compared to the 1.2B EUR in 2022, while there was an additional 14.4M EUR improvement in the value of the inventory of finished goods and work in progress. Unfortunately, the income statement clearly shows the COGS increased by 46M EUR while the staff costs increased by 3% or approximately 8M EUR as well. And while some of the other operating expenses decreased, this wasn’t enough for Viscofan to report an increase in its operating profit.

On top of that, Viscofan’s finance expenses increased as well, and as the income statement above shows, the net finance expenses increased from 0.2M EUR to approximately 6M EUR. That is somewhat surprising as the company has a very decent cash position and hopefully Viscofan can keep its net finance expenses within a reasonable range going forward.

The pre-tax income decreased by approximately 8%, but fortunately the Spanish company received a much lower tax bill which allowed it to record a 1% higher net profit of almost 141M EUR, which works out to 3.05 EUR per share. As the image below shows, the company was able to capture higher deductions while the adjustment to the previous year’s income tax increased by almost 5M EUR. This reduced the total tax pressure, resulting in an average tax rate of 16.5% compared to the 24% in FY 2022.

Readers are warned the low amount of income taxes likely is a non-recurring item and the total tax pressure will continue to fluctuate a bit.

In the previous article I was also zooming in on Viscofan’s cash flow performance as that’s ultimately what will allow the company to invest in additional growth.

Looking at the 2024 cash flow statement, Viscofan reported a total operating cash flow of almost 146M EUR, but this included an 86M EUR investment in the working capital position while it also included a 41.2M EUR tax payment although only 28M EUR was due based on the 2023 income statement. On the other hand, we should also deduct the 6.3M EUR interest payments and the 5.3M EUR in lease payments. This results in an adjusted operating cash flow of approximately 239M EUR after also adding back the interest income on the cash pile.

The total capex was approximately 77M EUR, which results in an underlying free cash flow result of approximately 162M EUR. Divided over 46.2M shares results in a free cash flow result of approximately 3.5 EUR per share.

As the image below shows, approximately 16% of the total capex was spent on capacity expansion; that’s approximately 12.5M EUR which means the underlying sustaining free cash flow is approximately 27 cents per share higher (at 3.77 EUR per share).

The capacity expansion comes at an opportune time, as the company expects the casing market to return to growth after it shrank by 4% in 2023.

2024 has started slow, but the full-year targets remain intact

Although the company reported a 6% revenue decrease in the first quarter of the current financial year, it is important to realize a substantial portion of the revenue decrease is related to lower energy sales. In FY 2023, approximately 7% of Viscofan’s revenue was generated by the sale of electrical power from its cogeneration facility (which generates more power than Viscofan needs). As the image below shows, approximately 40% of the difference in revenue is attributable to the lower revenue from energy sales, while the traditional business shrank by ‘just’ 2.5%.

The net income in the first quarter of 2024 was just 31.6M EUR, which is just 68 cents per share. That’s definitely a bit lower than I had anticipated, but the company has reiterated its full-year guidance.

For the current financial year, Viscofan expects a total revenue of approximately 1.275B EUR and an EBITDA of 290-300M EUR. This should result in a net profit of around 160M EUR (the midpoint of the 156-164M EUR guidance).

I’m also pleased seeing the low capex guidance as this is substantially lower than the depreciation and amortization expenses, although it still includes some growth investments as Viscofan is currently building a new cellulose and collagen casings converting plant in Thailand which should start operations by the end of this year.

We know the total amount of depreciation is approximately 84M EUR per year. Assuming a stable lease payment schedule of 5M EUR per year and using the 65M EUR capex guidance, the net free cash flow will be approximately 14M EUR higher than the reported net income.

Investment thesis

This means that based on the current guidance for the 2024 financial year, Viscofan will report an EPS of around 3.45 EUR per share while the net free cash flow result should be 3.75 EUR per share. Assuming approximately 10M EUR of the full-year capex will be spent on growth initiatives like the new plant in Thailand, the sustaining free cash flow result will likely be 21-22 cents per share higher and come in close to 4 EUR per share.

At the current share price of around 60 EUR, Viscofan is trading at approximately 17 times its anticipated net profit, while the sustaining free cash flow yield is approximately 6%. Looking at the EV/EBITDA multiple, Viscofan is currently trading at approximately 10 times the anticipated EBITDA for this year. Fellow author Gold Panda identifies Viskase (OTCPK:VKSC) as a competitor of Viscofan, but due to the very low market cap and lack of volume, I prefer to stick with the larger company in the space.

The new plant in Thailand should have a positive impact on Viscofan’s results in 2025 and the analyst consensus estimates call for an 8% EBITDA increase which will likely boost the sustaining free cash flow result to in excess of 4 EUR per share.

Viscofan has a pretty boring business model, but its performance is pretty consistent and the lower volumes in 2023 are likely just a temporary road bump as the company expects the casing market to get back to its historical growth rate of 2-4% per year.

I currently have no position in Viscofan but could be interested in a long position on weakness.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.