Zetar Preliminary Results

Zetar’s preliminary results were in line with expectations, which had been reduced earlier in the year as a consequence of lower seasonal orders over Easter. Progress since then has been good, with increasing proportions of everyday lines and licensed product. Like-for-like sales in the first 11 weeks of the year were ahead by 7%. This, with the lower overheads following cost cutting, should mean a recovery in margin and profit in the current year. The well-covered dividend has been increased by 33% and the shares remain on a deep discount rating.

Bringing on the branding
In a competitive market place, differentiation is crucial both for the supplier and for the grocer. Zetar’s strategy is threefold: to concentrate on product innovation; to develop the branded and licensed branded portfolio; and to increase the proportion of revenues derived from everyday lines, reducing dependence on the key confectionery seasons of Easter and Christmas. Progress has been made on all fronts, with up to 500 new product lines being introduced in the reporting period (of which about 50 are for everyday lines), brands representing 34% (33%) of FY12 sales and everyday products growing to 54% of sales. The branded proportion is a little behind plan within the Natural Snacks division, but (in Confectionery) Tango and (in both categories) Guinness-branded product is now on shelf. Further well-known brands are expected to be signed up during the current financial year. A reduction in the number of overall Stock Keeping Units (SKUs) listed will also help keep margins at the higher level.

Organic growth into Northern Europe
First listings have been achieved for Christmas 2012 into Carrefour, Casino and Auchan and planning is now underway for the 2013 Easter season. Character licensing is a well established element of the French market and Zetar has been able to extend its licences for Hello Kitty, The Simpsons and Power Rangers.

Valuation: Undervalued on all metrics
We have valued Zetar using three methodologies: peer group valuation; examination of recent corporate transactions in the sector; and on a net asset basis. Allowing for a 25% size/liquidity discount for the first method and a 30% discount to reflect the absence of bid premium on the second method, the three values derived per share are 339p, 254p and 355p. At the midpoint, 305p (43% ahead of the current price), the shares would still only be valued at a current year P/E ratio of 7.3x.

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