Value Investors Club _ Post Holdings Inc (Post)

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11/16/2015 Value Investors Club / POST HOLDINGS INC (POST)

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Description

Situation Overview: Since its spinoff from Ralcorp in 2012, POST has been on an M&A tear,completing over ten acquisitions and levering its balance sheet to ~6.0x EBITDA. While the pace

and strategic rationale for some of these acquisitions have given investors pause, the ongoing

diversification of its business has transformed it from a pureplay cereal company to a higher

growth packaged food company with a more diversified breakfast portfolio and estimated 60%

of sales in higher growth categories. Despite transitory issues from operational missteps and

headline risk from Avian Flu, POSTs strong FCF generation, which yields 6%+, highlights the

30%+ levered returnof this public LBO.Price target of $90.

Why Situation Presents Itself: Given the pace and breadth of recent acquisitions, and the

resulting opacity in the earnings power of the proforma business, there is concern that POST has

not "bought right" and that recent transactions do not justify their multiples and associated

leverage. POST chunked Q314 earnings attributable to the performance of these acquisitions

(Dymatize, Premier), significantly reduced FYE guidance (again), and raised concerns about the

companys integration ability. The stock sold off sharply nearly 25% in the months after Q3

earnings. Although the stock has performed well since then on improved quarterly earnings,

FYQ2 earnings were dampened from the AI overhang stock sold off from $51/share to

$42/share. Finally, the acquisition of MOMs brands which at first was received with alukewarm response as it doubled down on the secularly challenged cereal category will likely

provide for significant bottom line contribution from rationalized trade spend and additional

upside to the $50M synergy guidance (yet to be appreciated). At 10x EBITDA, a material discount

to a lower growth competitor set, we believe that valuation today reflects low expectations in the

turnaround in business fundamentals (cereal, Active Nutrition), conservative assumptions over

the cost savings opportunities at MOMs, nor give credit to the rapid deleveraging power of

POSTs business model.

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POST HOLDINGS INC POST

October 01, 2015 by smash432 (/member/smash432/52655)2015 2016

Price: 59.00 EPS 0 0

Shares Out. (in M): 73 P/E 0 0

Market Cap (in M): 4,307 P/FCF 0 0

Net Debt (in M): 3,962 EBIT 0 0

TEV: 8,269 TEV/EBIT 0 0
http://www.valueinvestorsclub.com/member/smash432/52655http://www.valueinvestorsclub.com/member/smash432/52655http://www.valueinvestorsclub.com/logout


2/11



Notable Events:

o On 1/25/2015, POST announced the acquisition of MOMs Brands for $1.15bn.

o On 4/28/15, POST reported that ~10% of its Michael Foods egg supply was affected by the

current highpathogenic avian influenza (AI) outbreak, with the expected impact raised to

~14% of its supply as of its F2Q15 report on 5/7/15, and then again to ~20% on 5/12/15. By

August, POST announced that through its cost controls and force majeure pricing initiatives,

the AI headwind had effectively been mitigated.

o On 8/12/15, POST raised ~$300M in a mixed shelf offering for incremental M&A

o On 9/2015, POST closes Dymatizes manufacturing plant and permanently transfered to co

packers. POST also purchased Williamette Egg farms, which should add $15M in EBITDA to

FY earnings.

Catalyst Path & Timing:

o

We believe that POST sentiment has troughed and is already on the rise, and the path togetting paid will be from the following:

- MOMs / POST integration updates, which will most likely start in Q315; we would expect

either 1) an acceleration in the timing of synergies/cost savings realized and/or 2)

increased synergy targets (increased from $50M guided).

- Ongoing IRI data on POST/MOM cereal trends, which so far have demonstrated strong

momentum. The latest scanner data shows POST growing sales in the latest 12 week by

3.8% vs. K (4.1%) and GIS (4.8%) and gaining 1pts of market share.

- Active Nutrition earnings have troughed, and we expect this segment to contribute by the

end of the year to early 2016. Although this is likely a $40$60M EBITDA business (less

than 10% of overall POST profitability), we expect trading multiple expansion vs. bottom

line contribution to be a driver of share appreciation from this business.

- We are in a holding pattern in Michael Foods as the fallout from AI has been ongoing and

who emerges as a winner/loser remains to be seen. However, the most recent financial

updates has shown POST to be adept at mitigating the epidemic and believe Michael

Foods is in the best position to gain market share from competitors (Cargill/Rembrandt)

as they cull customers. So far, AI has not negatively affected POST's profitability.

i) Avian Flu will most likely persist as an overhang for the foreseeable future with the

possibility of a resurgence in the fall as the weather cools.

- With career Chairman/CEO Bill Stiritz as the Chairman of POST, potential growth through

M&A is always in the cards. POST currently sits on about $1billion in dry powder

(including accordion facility), and given Stiritzs reputation, we would expect continued


3/11



M&A both bolton and larger acquisitions (CAG rumors of buying back Ralcorp or the

Consumer Foods Group are ubiquitous although the most recent news is that POST has

not submitted a bid).

Conditions / Miscellaneous: Convertible Preferreds

o

Holders can convert the 2.4M shares at 2.1192 shares of common stock per share ofconvertible preferred ($47.19 conversion price; 5.09 share dilution impact)

o Holders can convert the 3mn +.2 overallotment shares at 1.8477 shares of common stock

($54.12 conversion price; 5.54 share dilution impact).

Over the past two years, POST has transformed from a onecategory company (challenged

RTE cereal category) to providing a diversified product offering in higher growth

segments.o

POST has acquired over 12 companies in the areas of sports nutrition, egg products,

pasta, cheese, refrigerated potatoes, and private label peanut butter/granola.

o The chart below illustrates what the sales and EBITDA attribution is per acquisition in

addition to the implied multiple. Assuming $250M in EBITDA contribution from the POST

cereal base business on a normalized basis and assuming NO organic growth, POST is a

$800M+ EBITDA company (yearoveryear bridge included later on).

o Proforma for these acquisitions, nearly 60% of POSTs business is in moderate/high

growth product offerings outside the cereal category (although we believe cereal will

actually be a flat growing category in the ST).


4/11



Upside to MOMs Brands Synergies is meaningful.

-

Background / Market Share: POST, which is the thirdlargest U.S. branded readytoeat

cereal manufacturer, regained nearly 1.4 market share points since its 2012 low to

nearly 20% (including MOMs) despite the categorys multiyear weakness (8% decline in

retail volumes since 2011). Interestingly, POST (not including private label) was the onlylarge cereal company to increase retail volume in 2014 despite the category declining

3%. The company expects the category to decline an additional 4% in FY2015, although

POST has been able to buck this trend given the acquisition of MOM. POST has gained

nearly 70 basis points of share in 2014 the highest gain among the top branded and

private label players over the yearago period, as 9 of its top 12 core brands have either

stabilized share or gained market share.

- The acquisition of MOMs Brands, which plays in the value end of RTE cereals, provides

for significant upside to the $50M of synergies management has currently outlined.

i)

Distribution: MOM drives the majority of its sales (more than 60%) in more rural

regions of the U.S. (e.g., Texas, Oklahoma, Washington, Idaho, Montana, Oregon,

Iowa, Nebraska, Florida, Mississipii, Alabama, Georgia, etc) while Posts top two

regions are the more populated Northeast and Great Lakes regions (inline

exposure with GIS and K).

ii) The bestinclass MOMs facilities and POST facilities are significantly under

utilized; IR has indicated that closing one of the facilities is definitely on the table.

For reference, POST closed its Modesto plant (made Grape Nuts and RaisinBran)which was a $14M costsavings off the bat.

- To put this in perspective, see a representative list of mergers in the food space and the

announced cost saving guidance as a % of the targeted sales. MOMs outlined $50M of

cost savings implies ~6.6% of targeted sales. Given the 100% overlap in product

category, we would assume cost savings near 910% of sales or $75M. Table below that

the floor in potential costsavings is in the mid6%.


5/11



Avian Flu is a transient headline issue; Michael Foods will most likely be the winner at

the end.

Brief Situation Overview

- On 4/28/15, POST reported that ~10% of its Michael Foods egg supply was affected

by the AI outbreak, with the expected impact raised to ~14% of its supply as of its F2Q15

report on 5/7/15, and then again to ~20% five days later on 5/12/15. As of its 5/7/15

update (when ~14% of the supply was affected), POST had preliminarily expected the

impact from AI to represent a $20mm EBITDA headwind over the balance of FY15 (5

months), based on a combination of the expected impact from the lost volume associated

with limited supply, as well as the higher cost of any supply POST is able to procure on

the open market (as of 5/8/15, average egg costs had increased +40% from 4/22/15, for

example)

- There was a false positive for AI on 5/27 according to the Nebraska Dept. of

Agriculture at a MFI laying hen flock of three million head in Bloomfield. This coincided

with an increased est. by Post of its egg supply impacted by AI to 35% from 25%. On 6/3,

Norfolk Daily News reported that follow up testing has failed to confirm the positive test.

- ***POST has enacted force majeure effective immediately on customers; as if the

latest earnings, POST has declared that AI headwind to profitablility has been effectively

mitigated.

What are the longterm implications? Absent AI, there will be clear winners and losers in the

next two years. Qualitatively, we find that Michael Foods, which has had the least exposure to

AI and a more diversified customer base, will be a clear winner while its competitors are


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either under financial duress or have key customer concentration. Furthermore, we would

expect MFI to actually implement insurance surcharges to their grainsplus contracts, which

will serve as a mechanism for further pricing gains.

- There are currently three players in the egg processing space Michael Foods, Cargill

(has exclusivity on McDonalds), and Rembrandt (private label).

- Anecdotally we are hearing the following from our channel checks:

i) Cargill is culling high profit business in order to serve its largest customer,

McDonalds. Currently, approximately 45% of Cargills supply has been infected with

AI. MCD is also now rolling out an allday breakfast menu, furthering contraining

Cargill to focus on its largest customers. We believe POST will be the beneficiary of

further customer attrition and potentially winning some of MCDs business.

ii) Rembrandt is financially constrained and is potentially on a lifeline. Out of 700

employees, they have already laid off 270 employees due to AI outbreaks. According

to public sources, Rembrandt has about 14.5M hens, of which 50% have beenexposed and destroyed.

(1) 5/1: Rembrandt, Iowa, announced that it will lay off 231. One barn housing

about 250,000 hens was infected, but 5.5 million birds were killed as a result.

(2) 5/21: Renville, Minn., announced it will have to lay off 39 workers in addition

to killing 2 million chickens after suffering Minnesotas single largest

contamination.

o Additionally, the current backdrop in the commodity complex (corn and soy), which are

at multiyear lows, will provide some tailwind to MFIs egg EBIT as feed costs fall on

delayed pass through.Chart for illustrative purposes only.


7/11



The complexion of POSTs earnings in recent quarters has been obfuscated by the myriad

of acquisitions in addition to integration misexecution. Normalizing for what we

believe are only momentary issues, we believe POST has the ability to generate over

$800M+ in 2016 and close to $900M in EBITDA by 2017

- POST raised their FY guidance from $585M$615M to $635M $650M on in August, even

admist the AI headwind.

-

The below 2016E EBITDA bridge attempts to reconcile the noise of the aforementioned

integration issues.

- Note: that assuming no organic growth, 2016E EBITDA would be $800M+ purely on FY

contribution from the MOMs acquisition and from realized cost savings from the MOMs

acquisition vs. a fullybaked $780M consensus 2016 EBITDA number. Including organic

topline growth of 3% or so would contribute ~$25M in incremental EBITDA or

~$830M in 2016E EBITDA.


8/11



At the heart of POSTs business model is a public LBO levered ~6.0x+ with significant FCF

generation that will be the ultimate transfer of wealth from debt to equity holders. The table

below illustrates this deleveraging scenario.

o Historically, POST has traded between 8.5x EBITDA and 11.5x EBITDA. This was during a

time in which the company was either a secularly challenged onecategory food company or in

the midst of integrating multiple acquisitions. Although the company is currently trading ~10.2x

EBITDA off PF 2016E EBITDA, we would expect the business to hold this multiple (inline with

mature businesses GIS, CPB, CAG) as the companies integration strategy bears fruit in the form of

FCF generation/deleveraging.

o Reviewing the comps, note that the space trades fairly tightly in the 10x15x EBITDA range.

The names we comp POST to are GIS, CPB, and CAG (which trade tightly in the 12x13x

range).

-

In comparison, POST has a vastly superior topline growth algorithm driven by aboveaverage growth in Michael Foods and Active Nutrition, which is offset by the more

challenged cereal business, although we see vastly superior bottom line contribution from

this business.

i) From comps table, CPB, CAG, and GIS have either contracted topline growth in

forecasted 1415 and which is flat in 1516. By comparison, we forecast POST to

grow in the MSD to HSD for the next two years, built on a constructive industry

backdrop for Michael Foods and turnaround in Active Nutrition (albeit, still

conservatively modeled). Note that we do not model a turnaround in the cereal/MOMs

segment but conservatively give credit for bottom line contribution from costsavings.

- Although comparing the margin structures of POST vs. the comp set is less favorable and

somewhat difficult, we note that the growth rate in EBITDA from 2014 to 2017 for the

vast majority of the space is in the LSD. In particular, CPB, CAG, and GIS are forecasted to

growth from 201417 at 1% to 3% CAGR . Laying over the synergies from the MOMs

acquisition alone yields close to a DD growth. POSTs EBITDA margins of 13%14% is

inline with CAG vs. CPB and GIS which are in the 18%19% range.

-

We believe investors are over penalizing POST for execution and a levered balance sheet.However, as the analysis shows per below, POST superior FCF generation will delever

rapidly to a manageable ~4.04.5x EBITDA range, which is similar to CAGs leverage, and

should yield a rerate to a more appropriate 12x EBITDA multiple.


9/11



I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise hold a material investment in the issuer's securities.

Catalysto Ongoing M&A: mgmt is focused on acquiring bolton platforms and divesting nonstrategic

businesses (would not be surprised to see cheese portfolio, a drag to Michael Foods profitability,being divested).

o

Weekly RTE Cereal Nielsen Data, which should show continued pricing / market share

improvement from the combined MOMs/POST portfolio.

o

MOMs targeted cost savings Q415: Mgmt announcing cost savings update from MOMs

acquisition; FY 2016 should highlight upside to $50M cost savings target.


10/11



o

AI Fall 2015: headlines have played out would expect to see some material improvement

on margin side from force majeur and POST gaining new customers from competitor fallout.


11/11


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