Value Ideas Blog
This is the continuation of our analysis of the Vetropack Holding.   At first, we will show you the strategic positioning of the company by giving you a geographical overview including Vetropack’s and competing sites. Keep in mind that for most products the maximum transport distance is 150 km. We also added the total sales per country in mio pieces. It has become clearer that Vetropack is in good company at almost every production site. That explains why the management announced they were not able to push thru price adjustments, competition is strong enough in most regions.   MAP   Furthermore, as you probably know, political events in the Ukraine have influenced its currency risks and Ukraine may need a devaluation in order to pay its debt and re-establish its exports.     In 2012 Vetropack generated about 15% of its revenues in its site in Gostomel (UE) which was fully employed at the time. Given constant revenues, different exchange rates (UAH/CHF) and an EBIT-margin of 0.10 we will consider the following scenarios:   UE site  
  • Constant development from now, exchange rate at 0.09 CHF/UAH, creating revenues of 78 MIO CHF, EBIT of 7.8 MIO CHF
  • A drastic devaluation to 0.06 CHF/UAH, creating revenues of about 50 MIO CHF, EBIT of 5 MIO CHF
  These calculations imply that all costs occur in the Ukrainian site itself. Typically, gas is traded in currencies as dollars or roubles; that could possibly decrease the EBIT-margin.   Another important step for an appropriate valuation is the prediction of necessary investments. All combined, Vetropack owns 16 melting tanks. In 2012, two tanks needed to be repaired among other small investments. Given that one tank will need repair every year and in a year without such expenses, as in 2013, investments equal about 46 MIO CHF, the average investment should be around 80 MIO CHF, to be conservative. In the long term, that should make an EBIT of about 75 (72.2) to 80 (77.2) MIO CHF possible.   Now let’s look at the growth factors. While since 2008 overall revenues have decreased by about 5.3% per year, there is an upwards trend since 2011 that the semester report 2013 has confirmed. We will take a fairly conservative 2.5% short term growth into account for the next ten years. In the long term, we estimate growth just at the Swiss inflation rate of 2%. With help of the weighted average cost of capital in the packaging and container industry, adjusted by Vetropacks debt ratio, we used 7% as WACC. To stay conservative, we used a 10% discount factor.   Our DCF Model contains several inputs for cost of sales, operating expenses, inventory, payables and receivables. In our projections we used the most current press statements (the growth of the business is limited at the time) and recent financial developments (an increase in payables). It leaves us with a fair stock price of 2’207 CHF. To be fair, at the current depressed price the margin of about 26% is not extraordinarily strong but it is comparatively interesting in the current market situation.   Vetropack trades slightly above book value, the P/B is 1.07. With our estimated ROIC of 9.93 %, ROE of 13.1% and ROCE of 9.18% that would give us an adjusted ROIC of 9.3%, adjusted ROE of 12.2% and an adjusted ROCE of 8.6%. In our opinion, political distress and the economic environment have put strong pressure on the stock lately and have caused a price decrease.   At this point, we want to quote from “The manual of Ideas” by John Mihaljevic:  
On more than one occasion, we have heard investors respond as follows to a deep value investment thesis: “The stock does look deeply undervalued, but I just can’t get comfortable with it.” When pressed on reasons for passing, many investors point to the uncertainty of the situation, the likelihood of negative news flow, or simply a bad gut feeling. (…) Comfort can be expensive in investing.”
“The point when there’s a valuation extreme is precisely the point when the emotional pull – in the wrong direction – is strongest.”
  And James Montier:  
“People love extrapolation and forget that cycles exist. The good news is that you get paid for doing uncomfortable things, when stocks are trough earnings and low multiples their implied return is high, in contrast you don’t get paid for doing things that are comfortable.”
  There is, however, the question whether the project of chemically hardened glass will be realized in great volumes. It should remain unsolved until the next year. In case the project really is profitable, it would first replace reusable glass bottles and later possibly combat PET bottles. Realistically, the development is highly uncertain.   In conclusion, we think that Vetropack is still undervalued. It has got a relatively small margin and some uncertainty in the Ukraine as well as the newly planned hard glass project, but it is a solid, transparent family-owned business that has predictable cash flows. It will be very interesting to see the 2013 results on March 25th. We increased our holding of Vetropack to a half position. Disclosure: Long VET at time of writing. Disclaimer.


  • Dear Felix,

    thanks a lot for the analysis. I do agree with a lot of it and think that Vetropack is an investment worth considering.
    Two comments:
    1) In part one you are showing a very interesting analysis comparing Vetropack to various compietitors. I fpound that Gerresheimer Glas would be one of the most natural peers. Any reason why your are leaving it out?
    2) You quote a P/B of 0.65. This is not correct in my view. Equity as of the latest semiannual report is 630mm CHF.
    Vetropack has 234,000 Bearer Shares plus 880,000 Registered Shares and one Bearer Share participates in the capital as much as 5 registered shares. So the total number of shares is around 400,000 in bearer equivalent shares. With a price per share of around 1,600, the total market cap is roughly 640mm CHF and the P/B ist slightly above one – still not expensive, but quite different from a discount to book. Would you agree?

    Thanks and keep up the good work.

    • Good morning lathinker,

      thank you for your comment! About your first statement: I will look into it and post some additional numbers. About the Price/Book: When I first came up with a P/B of 1.07 (which should be correct at this time) I let the Vetropack website guide me falsely to assume a market cap of 407.33 mio CHF. So you are right, of course; the owner shares trade at about the stated P/B, but for the total P/B we need to add the registered shares. I will make an annotation!

  • Hi,
    one quick remark: It is pretty meaningless to look at the CHF numbers. As the majority of the business is in NON-CHF, you should convert to EUR. Especially for slaes grwoth etc.


Leave a comment.

Your email address will not be published. Required fields are marked *

* *