The facts: We downgraded Acomo to Hold with a target price of EUR 11.50.
2010 has been a great year for Acomo and for its shareholders. The company enjoyed favourable market conditions in most of the markets and product segments it operates. On top of that, it announced the acquisitions of the Deli tea and seeds businesses and of King Nuts, together more than doubling the company in size. Shareholders saw their holdings in Acomo more than double in value, outperforming both the local AEX benchmark as well as the European Stoxx index.
The increase in the share price of Acomo means that certain conditions have been met for the company to redeem the EUR 40m convertible bond early, which it plans to do. Bondholders are expected to convert their bonds into shares as they trade well above the conversion price. This will trigger a 30% increase in the number of shares outstanding for Acomo.
The most important benefits of early redemption and conversion are a lower interest bill and better leverage ratios for the company. Annual net profit will increase by close to EUR 2m and the net debt to EBITDA ratio moves from 2.4x to 1.5x based on our 2011 estimates. In addition, Acomo's potential investor base grows as a result of better liquidity and a higher market capitalization.
The flipside of conversion is that existing shareholders face dilution of about 18% of earnings per share. We show that Acomo's 2011 EPS estimate decreases from EUR 1.31 to EUR 1.08. This decrease is the result of the lower interest expenses on the one hand and the 30% increase in number of shares outstanding on the other. The increased number of shares also is expected to lead to a larger cash outlay for dividends. As we believe the company will prioritize to de-leverage its balance sheet, we have lowered our dividend per share forecasts.
The conversion also raises Acomo's valuation multiples. The 2011e P/E ratio increases from 8.5x to about 10.4x as a result of the EPS dilution. The 2011e EV / EBITDA increases from 6.9x to 7.4x reflecting the net effect of a c. EUR 60m higher market capitalization and a EUR 40m debt reduction. The P/E ratio increases above historical levels as a result, while the EV / EBITDA comes in line with the historical average. Finally, our updated DCF model shows a fair value of about EUR 11.50 per Acomo share. Our valuation analysis suggests little further near-term upside for the shares. We raise our target price to EUR 11.50 (from EUR 10.40) and we lower our rating from Accumulate to Hold.
Conclusion & Action: Acomo shares easily passed our target price late last year to finish an outright fantastic year in which the shares more than doubled on strong results delivery and two large acquisitions. The increased share price enables Acomo to opt for early redemption of the EUR 40m convertible bond that was issued in June 2010. This early redemption lowers Acomo's interest bill and improves leverage ratios. However, Acomo's number of shares outstanding increases by 30% and the conversion dilutes EPS by 18%. We also assume dividends will not be increased as much in the next few years as the company prioritises to de-leverage the balance sheet. Finally, the conversion increases valuation multiples, especially pushing the P/E ratio above the historical average. We raise our target price to EUR 11.50, but switch to a Hold rating, down from Accumulate.