I have been following Nomad Foods (NOMD) for several years now as I appreciate the company’s aggressive M&A policy in the highly fragmented frozen food sector. Nomad is able to pick up smaller competitors or bolster assets at relatively low valuations and by incorporating them into the existing corporate structure it is able to unlock synergy benefits and economies of scale.
Although Nomad’s primary listing is on the NYSE, the company reports its financial results in Euros and I will be using Euros as my base currency throughout this article.
Nomad ended the year on a low note
The business has performed well during the COVID years as demand for frozen meals has increased, but now has to deal with the return to normal which sees demand for frozen meals declining. On top of that, Nomad is not immune to pressure on margins linked to inflation and the fourth quarter performance was rather weak and overshadowed an excellent performance earlier in the year.
During the fourth quarter, Nomad Foods experienced a 7% increase in revenue but this was mainly due to the impact of its mergers and acquisitions strategy, as organic revenue declined by 4.5%. Net profit of EUR 0.33 per share is not great (especially compared to EPS of EUR 1.22 for the first nine months of the year), but Nomad should be able to mitigate the impact of the inflation over the next few quarters, as it has been able to raise prices for its customers, but there is always a lag.
Looking at the full year result, revenue grew to over €2.6 billion, but as you can see in the image above, gross profit was down just over 2. Fortunately, Nomad was able to reduce some other operating expenses, but this positive element was completely offset by a higher amount of expenses related to exceptional items. On top of that, net financial charges increased, which weighed on both pre-tax profit and reported net profit which amounted to just €181 million or €1.02 per share.
The adjusted net income was, however, significantly higher, as you can see in the following image. There were a bunch of one-off items that weighed on net income but are expected to be non-recurring. On an adjusted basis, net profit exceeded EUR 276 per share, representing EPS of EUR 1.55 per share based on an average number of shares of 178 million shares outstanding throughout the year. the year.
Nomad was also very transparent and provided a clear breakdown of non-recurring items.
My investment thesis for Nomad Foods has always been built around the company’s free cash flow profile. Mainly because sustaining capital expenditures tend to be lower than depreciation expenditures, but also because the whole business “buy and deleverage” model needs dollars and euros rather than just generating an accounting profit.
In 2021, Nomad recorded an operating cash flow of €474 million, but we still have to deduct the €56 million in taxes paid as well as the €36.5 million in interest payments net and the 19.4 million euros of lease payments.
On an adjusted basis, Nomad Foods reported operating cash flow of €362 million and since total capital expenditure was €79 million, net free cash flow during the financial year 2021 was 283 million euros. Using the current share count of 173 million shares, free cash flow per share was EUR 1.63 per share, or approximately $1.80 using a EUR/USD exchange rate of 1.10 . Keep in mind that this excludes one-time items, so the FCFPS of $1.80 is based on “normalized” trade performance.
Aggressive purchase and deleveraging plan not under pressure
Nomad made a large acquisition in 2021, resulting in a cash outflow of almost €600 million. At the end of 2021, Nomad had EUR 254m of cash on the balance sheet, EUR 29m of short-term debt and around EUR 2.2bn of long-term debt for a net debt of just under EUR 2bn.
Adjusted EBITDA in 2021 was 487 million euros and this includes the contribution of only a few months from the Fortenova group which was acquired on September 30and. While the debt ratio of around 4x EBITDA seems to be relatively high, keep in mind that Nomad is currently at the “peak” of its debt cycle as it has made acquisitions to the tune of more than 700 million euros over the past two years, while has spent nearly 700 million euros to buy back its shares.
For 2022, the company expects its EBITDA expected to grow by high single digit percentage and if I apply 8% EBITDA growth, FY2022 EBITDA will likely be around €520 million. Meanwhile, net debt is expected to decline towards 1.7 billion euros thanks to free cash flow this fiscal year, meaning Nomad Foods will likely end this year with a debt ratio of just over. of 3.
Exactly because the company is not paying a dividend, it can use its cash flow to aggressively reduce its net debt and pursue other mergers and acquisitions this year.
Nomad Foods has to deal with inflation but management doesn’t seem too worried about it as a series of price increases have been launched and it just takes time for the impact to be felt in the income statement. Although prices are rising, there is no noticeable slowdown in demand as Nomad has gained market share over the past three quarters. The first quarter of 2022 may be the weakest of the year, but as ice cream business begins to pick up in the summer months, we should see sequential improvement.
For 2022, Nomad expects EPS above EUR 1.7 per share, which means the stock is currently trading at around 10 times earnings and around 10-11 times free cash flow earnings. The FCF could be slightly under pressure in 2022 as the company plans a series of investments while a new European directive on unfair commercial practices could also temporarily weigh on results.
I wrote put options on Nomad but those expired out of the money. And while I currently have no exposure to the company, I might start selling put options again as I believe the current valuation with a high single-digit free cash yield and an expected EV/EBITDA multiple of around 9 by the end of this year, Nomad seems to be very reasonably priced.