Notice: Authentic article from June 28th, 2019 analyzing Excessive Liner Meals will be discovered right here. “Declining profitability and a deterioration of monetary well being have created many doubts surrounding Excessive Liner Meals’ future prospects.”

Thesis

Excessive Liner Meals (OTC:HLNFF) has proven constructive indicators for buyers within the first half of 2019. Though gross sales quantity continued to say no, the corporate has proven enhancements in its operational effectivity and value discount. The tip of assorted non-recurring bills related to administration’s turnaround may see sturdy revenue margins for the rest of the yr.

Introduction

Excessive Liner Meals is a protracted standing frozen fish provider, working out of Nova Scotia and delivering its merchandise all through North America. The corporate has been working, in a single kind or one other, because the late 19th century. A span of 5 years or so could hardly appear vital compared to a historical past spanning over a century. For shareholders nonetheless the latest historical past has carried way more weight because the share value went via a steep decline beginning in 2015/2016.

After bottoming out in late 2018, Excessive Liner Meals’ inventory had a powerful begin to 2019, growing over 40% from its lows. A drop following the discharge of its second quarter outcomes rapidly reversed and the corporate is buying and selling inside a spread we beforehand indicated as its honest worth. Comparatively sturdy outcomes on the subject of value administration are the principle drivers of the inventory’s sturdy efficiency to start out the yr. Though gross sales quantity continued to say no, the agency confirmed better operational effectivity, in keeping with its important initiatives undertaken in 2018.

Narrowing margins as a result of poor value administration had hindered firm efficiency previously. The turnaround initiative undertaken by administration was meant to exit low margin product gross sales, with the purpose of making better prices financial savings, and returning to worthwhile progress by 2020. Administration’s efforts have so far appeared profitable. Slight enhancements to Excessive Liners steadiness sheet, coming from sturdy money flows, are additionally promising indicators for buyers. Headwinds are nonetheless current shifting ahead, however success so far has been comparatively in keeping with earlier steering.

Lowered Debt Improves Monetary Power

Excessive Liner Meals, as with many meals suppliers, depends closely upon its working capital accounts to successfully function its enterprise. The corporate’s steadiness sheet is made up largely by it is present accounts , versus different companies the place non present accounts, similar to PP&E, make up the vast majority of the asset base. For instance Excessive Liner’s stock makes up 33% of its complete belongings. Within the first half of 2019 Excessive Liner noticed a reasonably vital enchancment in its present account ratio, bettering from 1.95 in 2018 to 2.59 in June. The development got here on the again of sturdy money circulate that allowed the corporate to scale back simply over $31MM briefly time period debt. The non money working capital accounts fluctuated modestly however stayed in keeping with seasonal expectations.

For a enterprise of such nature, a powerful working capital place bodes properly for the corporate. Much more so in Excessive Liner’s case, on condition that the agency’s revolving credit score facility is asset-based and collateralized by the agency’s working capital accounts (accounts receivable and stock) in addition to different private belongings. Deterioration in these accounts may pose a risk to the agency’s liquidity place. Traders could be smart to watch the agency’s capability to keep up this place or enhance it all through the remained of the yr.

From a liquidity stand level the corporate should not have any points assembly operational bills because it at present has $146.7MM of accessible credit score to attract from its $180MM revolving line, with a April 2021 maturity. Mixed with its money place of $13.3MM, this offers Excessive Liner meals roughly $160MM in available funds. This quantity offers a adequate cushion to fight any attainable downturns in operations. Reliance on debt has not been a difficulty to start out the yr as the corporate’s money flows have proved adequate to fund all operations.

Wanting past 2019, one can see that Excessive Liner does have a large obligation inside the medium time period, a $324MM of a time period mortgage facility coming due in April of 2021. The flexibility to proceed producing sturdy money flows will doubtless see this quantity diminished previous to the maturity, nevertheless it nonetheless poses a big obligation. The doubtless situation will see the agency refinance the excellent portion upon maturity. This refinance would require the corporate to proceed improving its steadiness sheet with a view to set up a stronger monetary place, and ideally with it a decrease value of borrowing.



(Supply: Excessive Liner Meals Q2 MD&A)

Within the first 26 weeks of 2019 financing prices have risen yr over yr (YoY) from $10.7MM to $11.4MM, or roughly 6.5%. The rise provides to a slight pattern that has been rising over previous quarters as financing prices nominally, and as a proportion of gross sales, are rising. At present ranges the prices usually are not a important concern, representing roughly 2.3% of income, however given the pattern of declining gross sales, buyers would favor to see enhancements. Transferring ahead if the corporate is ready to proceed making enhancements in its value effectivity, administration ought to have adequate free money circulate to additional pay down debt, and consequently see financing prices diminished.

Robust Money Flows For 2019

Excessive Liner’s capability to generate comparatively sturdy money circulate got here out as a shiny spot within the first half of 2019. Adjusted EBITDA elevated within the second quarter by 48% YoY to $17.88MM, and within the first half of 2019 by 38% YoY to $50.1MM. These will increase had been pretty sturdy and provides credibility to administration’s success in implementing their turnaround initiatives. The flexibility to extend EBITDA throughout a interval of declining income, and thus improve EBITDA margins, can act as some reduction for buyers involved with the declining gross sales quantity.



(Supply: Excessive Liner Meals Q2 MD&A)

Alternatively taking a look at money circulate from operations reiterates the purpose; web money flows supplied by working actions elevated near 50% yr over yr within the first half of 2019. That is doubtless a sign that administration is focusing the corporate’s efforts on greater margin product strains.



(Supply: Excessive Liner Meals Q2 MD&A)

Apart from exiting decrease margin product gross sales, administration made better provide chain effectivity a central initiative within the corporations turnaround, as they described it creating “One Excessive Liner Meals”. Some indication of success could possibly be present in value of gross sales which noticed a discount within the first half of 2019 YoY by 13% in $ phrases. This enchancment helped sluggish the decline in gross revenue at -4.8%, which is a constructive when in comparison with the drop in income of -11.3%, all of this doubtless a constructive affect to CFO. Larger operational effectivity is an effective signal as the corporate had been criticized previously for failing to completely combine a few of its acquisitions similar to Rubicon. Poor provide chain administration had pushed up value of gross sales, and thus started consuming away at revenue margins. A reversal of this pattern, even in a falling gross sales surroundings is a constructive, because it signifies a extra impact utilization of income generated.

Moreover, money flows from non-cash working capital noticed a considerable improve, notably within the second quarter. This improve was largely a results of favorable adjustments within the account receivable which noticed a 11.2% discount from YE 2018. The corporate’s capability to successfully generate money flows from its non-cash working capital accounts had not been a serious trigger for concern previously, however at all times comes as a constructive signal.

The dividend minimize from USD $0.435 to $0.15 (assumes a 1 USD to 1.33 CAD Trade) per share yearly that got here in Might eliminated a considerable money outflow for Excessive Liner Meals. Though not affecting EBITDA or CFO, the dividend cuts will liberate capital for different attainable makes use of . Administration has indicated within the second quarter report that this minimize is predicted to avoid wasting roughly $10MM yearly, going in direction of additional debt discount.

All of those adjustments in money circulate are constructive indicators for buyers within the quick time period. Long run success for the corporate nonetheless is just not practical if the downward pattern in gross sales persist too lengthy into the longer term. Administration has indicated that value reductions ought to greater than offset dropping revenues earlier than the corporate returns to natural progress in 2020. Traders will doubtless need to be affected person to establish if the corporate can succeed on this steering and start displaying stronger profitability. The rest of 2019 will function a great indication of how shut administration is to reaching this goal.

Prospects of Robust Profitability

As income declined with the decrease gross sales quantity, Excessive Liner’s profitability has been steadily deteriorating. As will be seen the EPS generated via the primary half of the yr was reasonable, with the bulk coming in Q1 and falling off considerably into Q2. This drop is in keeping with the seasonal nature of Excessive Liner’s gross sales, however on a yr over yr foundation the drop is clearly extra pronounced. A serious contributing issue to the drop off in Q2 got here from termination advantages paid out to staff beforehand laid off, because the agency noticed a 14% discount in its salaried work drive introduced on the finish of 2018.



(Supply: Excessive Liner Meals Q2 MD&A)

Administration has indicated no additional termination advantages are anticipated in relation to this workforce discount. This could permit Excessive Liner to exhibit sturdy revenue margins within the the rest of 2019. Adjusted web earnings removes these non recurring bills, in addition to different bills associated to the turnaround initiatives, and could possibly be utilized by buyers as a extra doubtless indication of what future margins could appear like. If the corporate can preserve its prices down heading into the remained of 2019, stronger EPS could materialize.

Moreover the discount in Promoting, Common, and Administrative (SG&A) bills comes as a great signal because the agency finds additional prices financial savings. Though not very vital in comparison with income, in occasions of falling gross sales something helps.



(Supply: Excessive Liner Meals Q2 MD&A)

Initially administration had indicated that the fee financial savings from the important initiatives could be a minimal of $10MM per yr, not together with the more moderen $10MM in financial savings generated from the dividend minimize. Within the MD&A of the second quarter report it was highlighted that Excessive Liner had introduced in AlixPartners, a consulting agency, to “assist additional analyze and establish enhancements related to our provide chain and different value financial savings alternatives”. This, together with an growth of the important initiatives is predicted to have a “vital improve within the complete web annualized runrate value financial savings […] as in comparison with the $10.Zero million value financial savings goal beforehand disclosed”.

The financial savings produced are anticipated to greater than offset the drop in gross sales quantity shifting ahead. Though the flexibility to scale back prices is a constructive signal for the agency, in the end buyers wish to see a return to worthwhile progress. As administration has indicated it expects this to materialize in 2020, the remained of the yr can be an essential indication of the chance of this situation.

Conclusion & Valuation

The primary half of 2019 noticed Excessive Liner produce comparatively constructive outcomes, though gross sales quantity continued to say no, this was largely anticipated. The constructive affect of the important initiatives undertaken has begun to point out indicators of lowering prices and probably producing stronger revenue margins going ahead. With a lot of its non recurring bills associated to the turnaround accomplished, the agency ought to be capable to produce stronger income via the remained of the yr.

Whereas these enhancements to operational effectivity come as a constructive signal, in the end the dropping gross sales can not proceed indefinitely. Administration has indicated a return to worthwhile progress by 2020; the second half of 2019 will function a measuring keep on with establish the chance of this consequence. Additional sturdy money circulate resulting in a discount within the firm’s debt place needs to be anticipated, and any misses on this entrance would come as a priority.

We are going to reaffirm our honest value goal of $8.25 to $9 USD based mostly on an Enterprise Worth to EBITDA ratio of roughly 10x (at present in USD, EV= $573.91MM, EBITDA= $63.4MM, EV/EBITDA= 9x). Whereas the indicators YTD are promising, the dropping gross sales nonetheless poses as a priority, even whether it is forewarned. Early indicators of a return to worthwhile progress may see this revised upwards, as administration so far has had a powerful displaying for its important initiatives. Though the inventory has been comparatively regular over the earlier months, any elevated volatility may create a shopping for alternative. We’d once more counsel taking a conservative strategy, and ready for an entry level beneath $6.75 USD per share. If additional success is achieved and the honest worth strikes upwards, this might change as properly. Though the general image is popping round for Excessive Liner Meals, there’s nonetheless room for enchancment.

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Disclosure: I/we now have no positions in any shares talked about, however could provoke a protracted place in HLNFF over the following 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.