Analysis of kri kri milk industry

  • Introduction
  • A bit of History
  • Company financials
  • Business segments, competitive advantage and competition
  • Risks
  • Valuation
  • Summary

Introduction

Kri-Kri Milk Industry is engaged in the production, distribution and sale of ice cream and yogurt. This Greek company was founded in 1954 by the Tsinavos family, which still manages the company and owns 73% of the business. The headquarters and main production facilities and distribution centre are located in Serres, in the north of Greece. A secondary distribution centre is located in Attica, in the south of Greece.

In 2019, the company achieved 113M€ in sales and exports were 41% of that figure. The company exports its products (mainly yogurt) to more than 25 countries, with UK and Italy being the biggest export markets. EBIT margin is around 15%.

The company was listed on the Athens Stock Exchange in 2003. Since then, sales have grown at a compounded annual growth rate (CAGR) of 13,4%. From 19,5M€ in 2003 to 113M€ in 2019.

At 6,30€ per share, the current market capitalization is 209M€. I have been invested in Kri Kri for some years now and, although the stock has become better known since they started publishing the reports in English, I still consider it has a nice upside potential. Perhaps because investors are still afraid of investing in Greece, who knows.

A bit of history

In 1954 George Tsinavos founded the company establishing a small pastry shop in Serres (Greece) with a variety of ice-creams. During the early years the company focused on ice cream production and delivery in the local market. In 1995 starts distribution in Athens and by the end of the 90’s they start the Greek yogurt production and expansion to international markets.

In December 2013, a fire broke out on the yogurt production plant in Serres, causing considerable damage. In less than 8 months, they buit a new yogurt plant which was more efficient and had twice the capacity of previous plant. During this period were they couldn’t produce yogurt by themselves they outsourced all the production. They had some supply chain problems and temporary lack of stock, however, yogurt sales only decreased an 11% that year.

In 2019, the company presents a new three-year investment plan of 27M€ in order to expand the production capacity in yogurt and ice cream.

Company financials

Income statement

Debt

Investments

For the last several years, the company has developed investment projects to increase production capacity as well as technological upgrading of both yoghurt and ice cream factories.

In the following table we can see that, for the last 7 years, investments have significantly outpaced depreciation & amortization.

In the 2014 investment figure, there is the 20M€ investment in the new yogurt plant that they had to build because the fire that I mentioned previously.

In 2019, they started a new investment plan of 26,6M€.

Suppliers

The company has no significant dependence on any supplier. Any supplier represents more than 10% of total purchases.

Proximity to farms allows them to deliver products with daily fresh milk.

Credit risk

Receivables of specific supermarket chains are credit insured with a contract covering credit losses, occurring from insolvency, up to 90%.

Receivables from foreign customers, are credit insured with a contract covering credit losses, occurring from insolvency, up to 95%.

Business segments, competitive advantage and competition

The company has 4 business lines:

  • Yogurt Greece
  • Yogurt Export
  • Ice cream Greece
  • Ice cream Export

The following two tables show where the growth is coming from:

As you can see, in 2019 exports were already 41% of revenue. Yogurt exports, the growth driver, is already 36% of total revenue. The yogurt division (Greece + Export) is 75% of sales.

Now we will have a look at each division, which I think is important to understand the business, including possible competitive advantages and competition landscape.

Yogurt Greece

This division represents 39% of total sales. Approximately, 70% of sales are branded products and 30% is private label. The company claims that one in four Greeks consume yogurt produced by Kri-Kri (between branded + private label).

To keep the division growing, the company is additionally focusing on profitable niches:

  • Healthy product line – high protein and super foods
  • Special formula for silver age
  • Lactose free products
  • Kids and infant product category

In branded yogurt they are the second largest producer in Greece. They have 96% brand awareness and are sold in 100% of Greek supermarkets.

Market share in branded yogurt:

Looking through the company presentations we can see that in terms of volume, they have gone from 4% market share in 2008 to 16,6% market share in 2020. I think this is very remarkable taking into account that Kri Kri started its yogurt production in the 90’s. I looked into the competitors websites and found that Fage, Vivartia (Delta) and Mevgal started their yogurt operations in 1964, 1994 and 1974, respectively.

At the end of 2019, this was the split of market share by player:

In terms of private label yogurt, Kri Kri has a 70% – 80% market shre.

Insights and competition (Yogurt Greece division)

Before the insights, I would like to make the differentiation between authentic Greek yogurt and Greek style yogurt. You can only say Greek yogurt of its made in Greece, with Greek milk. Greek style yogurt is not made in Greece. This is important for later when we have a look at the yogurt export division.

Going back to the Yogurt Greece division, I believe that Kri Kri is the lowest cost producer of Greek yogurt. You can see this by their market share in private label in Greece, which is 70-80%. Actually, they started the private label greek yogurt concept in Greece. Perhaps we could think that Greek supermarkets choose Kri Kri because they make the best quality yogurt. Well, with so many old and family owned Greek yogurt manufacturers I don’t think so. Obviously Kri Kri product is good, otherwise wouldn’t have this branded yogurt market share, but I definitely think supermarkets choose Kri Kri for private label because they are the cheapest. This is where the yogurt export success comes from (more on this later in Yogurt Export).

In relation to branded yogurt, could Kri Kri continue to increase its market share? I don’t know, but from my research and from what the Company told me a year ago, it results that the Greek competitors I put on the table before are very leveraged or have much lower margins, or both. I think this has been already an advantage for Kri Kri and probably will continue to be going forward. According to Fage and other sources, competition in the Greek yogurt market in Greece (and abroad too) is ferocious. This will be very tough for leveraged and/or lower margin competitors. Additionally, the leveraged and low margin competitors invest less money in new equipment or R&D, which makes them more vulnerable and Kri Kri already takes advantage of it and I believe will continue to do so.

Let’s have a look:

Fage: Is not a public company, but since they are financed in the capital markets they have to publish almost the same information as if they were listed, so you have annual and interim results in their website. What do we see? Sales in 2019 and 2018, went down 10% from previous year, which might indicate a serious sales problem, since Greek yogurt market overall is growing nicely. In 2017 (I haven’t gone further), they had 18,7% EBIT margin, but last two years has gone down to 10%. Current Net Debt / EBITDA ratio is 3x. Kri Kri has no debt.

Vivartia: This company was owned by listed Greek investment holding company Marfin Investment Group and has just been sold to the well known private equity firm CVC. Net Debt /  EBITDA is 6x, which I think is too much even for a food company.

Mevgal: Kri Kri told me that they have 2 – 3% net profit margins. Kri Kri has more than 10% net profit margin.

I would also like to mention that in relation to branded yogurt, if they have been gaining so much market share is because of the quality of the products and continuous innovation, not price, which is the success factor in private label.

Yogurt Export

Approximately, 82% of sales is private label and 18% is branded products.

Around 60% of total sales is UK and 25% – 30% Italy. Then comes Germany and Sweden.

All their clients are supermarkets.

Private label offers a strategic way to enter markets of interest with lower entry cost and build relationships. The strategy going forward is to expand the private label products portfolio and place branded products to existing customers.

Authentic Greek & Greek style yogurt market in its main export markets:

Italy: 148M€

UK: 305M GBP

Germany: 162M€

Other markets the company considers for geographical expansion: France, Spain and Russia.

Insights and competition (Yogurt Export division)

This division has been the growth driver of the company for the last 6 years and is expected to continue to be for the following years. The success of this division has come from the increased demand of Greek yogurt in developed countries for the last several years.

According to the IMAC Group, a market research company:

One of the key factors driving the global Greek yogurt market is the increase in health consciousness among consumers and change in dietary preference towards healthy and nutrient-rich food products. Owing to the increasing consumption of fat-free and weight management products, Greek yogurt has gained immense popularity among consumers.

So, how has the company gone from 2,4M€ in export yogurt sales in 2008 to 40,2M€ in 2019?

Kri Kri success in yogurt exports comes from the willingness of European supermarkets to have a private label authentic Greek yogurt product. Being (I believe) the lowest cost producer, as I mentioned before, is what has made Kri Kri so successful selling yogurt abroad.

But why are they the lowest cost producer? According to the company the main reason behind this is (1) the state of the art facility for yogurt production facility they built from scratch in 2014, after the fire that took place in 2013, and (2) easy access to considerable supplies of milk. Apparently, Greek competitors production plants are very old an much less efficient and automated than the production plant of Kri Kri. The good news going forward is that this advantage versus competitors might continue, because low margin and very leveraged competitors might not be able to afford a new plant, at least not all of them for sure. Fage, with 3 times Net Debt / EBITDA will build a new plant in Luxembourg, but the good news is that Fage is not into private label.

Another think that reassures me that they are the lowest cost producer is that from one of the conversations I had with the company they said that Vivartia and Mevgal, which are the ones competing in Europe with private label, are having a hard time to compete in price. The company also mentioned that when they lose a private label contract is not normally because they lose to a Greek competitor, but because they lose to a Greek style yogurt manufacturer. This is the case in Germany so far, according to them. Apparently, in UK and Italy they have been so successful because supermarkets there prefer to offer authentic Greek yogurt. The good news is that there are other markets were consumers prefer authentic Greek yogurt too.

Perhaps a company that is growing selling private label yogurt might not appeal to some investors, but keep in mind that they have 15% – 19% EBIT margins in the Yogurt Export division.

One more thing. Having this new yogurt production facility is also very important for exports for other reasons. Companies like Aldi and Lidl do a very thorough work before they start to work with a supplier. One of the things they do before starting a collaboration with a new supplier is to visit the manufacturing plant, warehouse, etc. I am sure they will not find the same quality of facilities if they go to visit the other Greek yogurt producers. European supermarkets know that if a supplier works with Aldi and Lidl is because it has ticked all the boxes. Kri Kri acknowledges that this has been a plus when starting conversations with a new supermarket.

Ice cream Greece

In 2019, this division represented 19% of total sales. They are the only Greek ice cream company with nationwide sales network. Points of sale: 16.000 in 2019, 15.000 in 2018, 14.000 in 2017.

They do branded and private label as well. Branded products are sold to Horeca channel and supermarkets through local distributors. Private label products are sold directly to supermarkets.

The market size is 223M€. The ice cream market in Greece, like in all developed countries, is already consolidated. They have 96% brand awareness and are the third largest player in terms of volume. The first competitor is Unilever, with a 24,4% market share. The second player is Froneri (former Nestle), which has 21,4%. Kri kri has 14,9% market share.

The strategy is to continue to increase points of sale, maintain high profit margins level and to capture any Private Label opportunity. Currently, 70% of sales is branded products and 30% is private label.

Insights and competition (Ice cream Greece division)

What I will say here is not an insight because I think is broadly known. Ice cream markets in developed countries are very consolidated. In Europe, for example, there are usually three brand names, Nestle and Unilever and a local brand. In Greece is the same. Between these three companies they have 61% market share (by volume).

Therefore, is like a natural oligopoly with stable market shares where the players, in general, do not get involved in cutting prices to win market share. In the Ice cream division, Kri Kri has 50% gross profit margin and 18% – 19% EBIT margin.

Here the competitive advantage is the brand and the nationwide distribution network, which makes it very difficult for new entrants.

Ice cream Export

In 2019, this division represented 6% of total sales. Ice cream exports are booming too, although from a very low base.

The company believes they have an opportunity to continue to increase ice-cream exports, within the private label segment, very rapidly (I asked also to the company what happened this year, because they are down big). The European ice cream private label market is 10b USD. Their clients in private label are ice cream companies and supermarkets.

I believe they have an opportunity to grow strongly at the beginning just by offering private label ice-cream to the same supermarkets that buy their yogurt. I believe some of them will go with Kri Kri. Moreover, Unilever and Nestle are not interested in making private label ice cream. A part from that, I need to dig deeper in this business segment. I don’t know who the players are in this space.

The branded product strategy is to continue to build the distribution network (like in Greece) in countries with proximity: Cyprus, Albania, North Macedonia, Iraq. They already have 5.000 points of sale. My guess is that in these markets, the ice-cream sector is not yet consolidated.

Risks

I just will copy a slide from one of the company’s presentations. I also consider these to be the main risks.

Valuation

Number of shares (in millions): 33,1

Stock price 03/12/2020: 6,28 €

Market Cap: 208M€

Valuation assumptions:

Note 1: Considering the interim results, I consider that 121M€ for 2020 is reasonable. It implies a 7,5% increase vs 2019.

Note 2: I picked up the 2018 dividend per share. In 2019, actually, it was already 0,18€ per share.

Note 3.1: Since they have achieved a 6% CAGR for the last 6 years, I consider a 3-4% to be reasonable. We can see the growth they have had for the last 6 years in a table at the beginning of the Business segments section.

Note 3.2: CAGR for the last 6 years has been 42%. The last 2 years has been growing 35%. The company thinks the rate growth will slow down going forward but still above 20%. I consider a 15% – 20% growth to be reasonable for the next 3 years.

Note 3.3: CAGR for the last 6 years has been +0,8%. We can see the growth they have had for the last 6 years in a table at the beginning of the Business segments section. We see that for the last 3 years the division has grown nicely.

Note 3.4: We can see the growth they have had for the last 6 years in a table at the beginning of the Business segments section. I consider a 20% – 25% growth to be reasonable, although I would like to comment with the company, as I said before, about the decrease they are having this year. I believe it’s a temporary think. Actually, in the yogurt export division they also had a decrease in sales in 2014. Even a company that is growing sales strongly for a long period of time, the sales graph is not always is a straight line.

Note 4: The company is already making 15%+ EBIT margins. I believe that a range of 14% – 15% is reasonable.

Note 5: As we see in the table below, the peer group trades at 21x. For this reason I consider that choosing 19x valuation multiple for Kri Kri is reasonable. Perhaps, one could consider that since is a tiny company compared to these mega giants, it deserves an even lower multiple. Well, I already put a lower multiple for this reason, but we have to consider that these big companies are essentially not growing and, with the exception of Emmi, all have much higher levels of debt than Kri Kri. Actually Kri Kri, has no debt.

Therefore, I estimate that Kri Kri Milk upside potential is 59% – 83%, which implies an IRR of 16% – 22% (including dividends).

Summary

  • No debt.
  • Strong balance sheet (equity = 62% of total assets)
  • Family owned company.
  • Defensive business with good growth.
  • High EBIT margins, in spite of doing a lot of private label yogurt and ice cream.
  • Increasing capacity for yogurt and ice cream production.
  • Lowest cost producer of (authentic) Greek yogurt. This has made the Yogurt export division to be the growth engine of the company, selling private label authentic Greek yogurt for European supermarkets. Strong growth will very probably continue for some years.
  • Largest producer of yogurt in Greece: 25% market share by volume (branded + private label). They have 70 – 80% market share in private label. Market share in branded yogurt (volume) has gone from 4% in 2008 to 16,6% in 2020.
  • Second player in Greece after Nestle in ice cream. Consolidated and stable market. Kri Kri has 50%+ gross margins in this segment.
  • Opportunity to have a piece of the 10B USD ice cream private label market in Europe.

Links of interest:

https://greekfoodnews.com/greek-yogurt-a-booming-global-trend/
https://greece.greekreporter.com/2019/03/11/greece-seeks-eus-protected-geographical-indication-status-for-greek-yogurt/

Disclaimer: The purpose of this blog is not to provide financial advice or recommendations to buy or sell specific investments. Please, do your own research before making any investment decision. If you are unsure of any investment decision, you should seek a professional financial advisor. 

19 thoughts on “Analysis of kri kri milk industry

  1. Ralf

    Thank you for posting this thorough analysis. After I saw the company in your first blog post, I analysed it, came to similar conclusions compared to you and started to build a position in the last weeks.

    Liked by 2 people

  2. Nice write up! From my point of view the Valuation was a bit weak.
    I usually prefer DCFs but still, multiples can be used (if you know what you do)
    19x sounds high to me, with CapEx > Depreciation, cashflow will be lower. So long-term growth has to be high to justify such a high multiple.
    You state a IRR, but when shall it trade at the above 19x and why?

    Like

    • SCE

      Thank you!

      I always use valuation multiples. I would only use a DCF for a company with very very predictable cashflows, like a motorway concession, for example. In my opinion, DCF can easily lead to mistakes in valuation. Despiste of that, valuation is some sort of an art, so everyone should use what has worked best for them over the years. I stick with multiples.

      You say 19x is a high valuation multiple because capex > depreciation. Well, capex has been higher than depreciation because they have been growing a lot and that requires previous capital expending to increase production capacity, mainly for yogurt. Two more things about the high level of capex:

      – As you can see in the investments section of the post, there is a 20M€ investment in 2014 for the new yogurt plant that they had to build because a fire destroyed previous plant. This plant will last many years from now and it is one of the two things that probably makes Kri Kri the lowest cost producer of yogurt in Greece. Most of the competitors have very weak balance sheets and can not invest like Kri Kri does, so they have older and much less efficient machinery, which makes it difficult for them to compete with Kri Kri in private label yogurt products.

      – The high number (15M€) in 2019, as you can see, forms part of the 2019-2022 new investment plant. These are millions that have been already spent and don’t produce sales yet.

      If they decided to stop growing and remain with current level of sales, capex would match depreciation in the long term.

      About the valuation time frame, it is up there, it’s three years. Why 19x? I already explained it too. However, the valuation multiple that each investor uses for a specific company will very probably not be exactly the same. Which valuation multiple we use comes from our experience. You might argue that 19x is too high and I might probably say you have a point. I think 19x is reasonable from what I see in this company. I follow the company closely, so if something in my thesis changes I will adapt my valuation assumptions accordingly.

      Liked by 1 person

    • SCE

      Not at all. Unfortunately, this has happened to me two times, so it is something I always think about. In this case I am not worried about it because in 2017 they made a big change when they started to post presentations and reports in English and doing roadshows in Europe and USA. You don’t do that if you want to take the company private at a cheap price. Actually, from one of the conversations with them I understood that they will be very happy to partner with someone like Danone who could help them grow more rapidly. If you partner with Danone, for example, you get access to best in class distribution network.

      Liked by 1 person

  3. My uneducated guess is somehow, that Greek Joghurt could be one of many (health) food trends that could end any time being when consumer preferences shift to the next (big) trendy thing. However, Greek Joghurt seems to persist so far…

    Like

    • Sutje

      Hi searching4value

      I don’t know if Greek yogurt is part of health food trend, I use it for cooking. Much better taste compared to other yogurts (including Greek style).
      And the Original Greek Yogurt from KriKri tasts really very good (end of advert) 😉

      Hi SME,

      Thank you for the analysis.
      Good to hear that KriKri is open to communicate with shareholder.
      Starting to buy shares several years ago and financial information only in Greek I tried to contact the management by phone.
      The guy at the switchbord always passed through my call to a phone where nobody picked it up.

      Regards
      Sutje

      Liked by 1 person

  4. Thomas

    Hi SCE, many thanks for this comprehensive write-up on Kri Kri. I am convinced by most of your points. However, I am just struggling with the barriers to entry. If the company can grow market share from nothing to #2 within such a short time frame any other producer might be able to repeat. If only a modern factory is required to gain cost leadership I am a bit sceptical given that competitors can do the same. You argue that competitors are highly levered and therefore won’t be able to invest to the same extend. However I believe that at least one player with 3x ND/EBITDA has enough fire power to do the same…. especially in this low interest rate environment.

    have you looked at Savencia – a french cheese/ Joghurt manufacturer.? Again, many thanks for the good write up….

    Liked by 1 person

    • SCE

      Hi Thomas,

      Thanks for your comments. I think that’s a very good point. I give you my thoughts on this.

      First, we have to take into account the ice cream business of Kri Kri. As I mentioned on the post, Kri Kri is the second market player in Greece. They must be in every supermarket chain in Greece, in lots of convenience stores in the country and probably very present in the horeca channel. For them, to start selling their yogurt in Greece was a lot easier than it would be for a new entrant. They just already knew all the distribution channels and the distribution channels knew Kri Kri. Obviously, they had to come up with a high quality range of yogurt products and a fair price, otherwise they wouldn’t have been successful.

      “If only a modern factory is required to gain cost leadership I am a bit sceptical given that competitors can do the same”.
      As I mentioned on the blog, I have identified two things that make Kri Kri probably the low cost producer of Greek yogurt in Greece (and abroad, because authentic Greek yogurt can just be made in Greece). First is their “new” production plant and secondly their closeness to considerable supplies of milk (have a look at the supplier section of the post). However, I think there might be something else in how Kri Kri operates that makes them be so efficient, but I haven’t identified nothing in particular.

      Anyway, could competitors build the same plant as Kri Kri in the same location? I don’t know the availability of land in the region to build a plant like this, but I am sure that if there is a place to build that plant, they could make a similar efficient production plant. However, they haven’t done it. I recommend you to have a look at 2015 annual report from Fage, page 34, and compare it with the 2019 table in the post. It is the market share table of the yogurt market in Greece. Competitors, knowing what Kri Kri was doing, have done anything to change Kri Kri increase in market share in the yogurt segment. If they can do it, why haven’t they? Is it financial weakness of competitors? May be is nothing of that and it is just that Kri Kri’s product is better…

      However, is not that Kri Kri is making them out of business. Is just that the others have lost market share (almost all of them, depending on if you look at volume or value) in favour to Kri Kri. Let’s see what happens going forward.

      “have you looked at Savencia – a french cheese/ Joghurt manufacturer?”
      I know Savencia. I looked at Savencia when I was studying Bel (still in my portfolio). Too much debt for me and although they have strong cheese brands, they don’t lead to good margins. In terms of yogurt, I don’t know their position.

      Like

  5. Redwood

    Thank you for this very interesting write up. Are you concerned about potential Brexit impact? The UK was €23m revenue (20% of total revenue) in FY19 which is potentially at risk. Tariffs are very high on yoghurt in the event of a no deal / WTO terms. The company states “Based on our analysis so far, Brexit is
    not expected to have a material negative impact on our activity” but they don’t explain how they reach that conclusion.

    Like

    • SCE

      Thank you Redwood. I am not concerned long-term (or even medium term) because I think that if there is no deal between UK and EU it will be so bad for some industries and companies that they will immediately do something. I think we will have workers and companies, on both sides, claiming: “haven’t we had enough with Covid-19 that now we have to suffer that you cannot reach an agreement?” Obviously, I am not a Brexit expert, but that is my opinion. If there is no deal before year-end, there will be some sort of a deal right after. That is my best guess.
      However, when I saw your comment I realised I had not discussed that with the company so I asked them. I was waiting for their response to give you an answer, but it is taking longer than expected. I will update here whenever they respond.

      Like

      • SCE

        The company expects free trade after Brexit. Apparently, tariffs on food seem even less unlikely as UK is a net importer. If tariffs were to be imposed on yogurts, the company estimates that these would be very low and therefore, the extra cost could be absorbed throughout the supply chain.

        Like

  6. Marlon Vella

    Thank you for this very interesting write up. Do you have any thoughts on the buyback program the company recently started?

    Like

    • SCE

      Thank you Marlon. Well, they started the program the 30th of September. So far they have repurchased 20.882 shares, which is 0,063% of share capital, so almost nothing.

      In my opinion the share buyback program is just to cover the stock option scheme (165.325 shares), although they said they could additionally repurchase around 1,5 million shares to cancel them. That would be around 10M€ at current prices (4,5% of share capital).

      The company is currently under the 2019 investment plan, which is 27M€. They still have to invest around 6M€ to complete the plan, so I think this goes before than repurchase 10M€ of shares (at current prices). So again, I think for the time being they will just go to cover the stock option plan.

      Like

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