Acomo Offers Strong Dividend Yield With Potential For P/E Expansion (OTCMKTS:ACNFF)

Acomo (OTCPK:ACNFF), a Dutch small-cap entity in the food and beverage sector, currently holds a 7% dividend yield, portraying its status as a dividend stock in the market. As the company continues its growth trajectory towards becoming a midcap entity, the market’s perception of Acomo is likely to evolve accordingly.

I rate Acomo a buy due to my belief in the potential for the company’s earnings to jump through strategic acquisitions post-debt reduction. This transformation could shift market perception from a dividend-focused stock to a growth-oriented investment. Meanwhile, investors can benefit from the current 7% dividend yield while anticipating the company’s next phase of growth.

Business Overview

Acomo functions as an intermediary across five segments: Spices and Nuts, Edible Seeds, Organic Ingredients, Tea, and Food Solutions. Operating within a cyclical industry with minimal susceptibility to disruption, it anticipates steady and consistent growth ahead.

Analyzing the historical stock price reveals a compelling story. Despite Acomo’s operation within a cyclical industry, their growth trajectory has remained gradual and consistent, showcasing adept management. However, starting from 2008, the market’s enthusiasm soared due to their growth strategy, reaching a peak in 2015 before this exuberance subsided. Over the past decade, the company’s stock price has been stagnant, remaining nearly unchanged. Meanwhile, the business fundamentals of the company have been steadily improving and catching up during this period.

History

Acomo’s fascinating history dates back to 1908, when its precursor, de Rubber Cultuur Maatschappij ‘Amsterdam,’ was listed on the Amsterdam Stock Exchange. A pivotal shift occurred in the 1950s after the nationalization of numerous Indonesian plantations, prompting a transformative phase in 1982 through a reverse takeover orchestrated by Catz International, a trading house focusing on spices and nuts. Currently, they resemble a contemporary of the Dutch West India Company. Their long-standing history already demonstrates the business’s steady and reliable strategy.

Competitive Advantage

We bridge the entry to the market for small producers by opening our sales and marketing network for them. – Acomo 2022 Annual Report

Acomo, although rooted in Europe, operates as a globally diversified business within an industry that bears moderate strategic risk. Today, Acomo stands as a globally diversified entity, proudly showcasing an expansive product portfolio encompassing more than 600 unique offerings and conducting operations in nearly 100 countries. Their diversified approach significantly shields them from major geopolitical and currency risks.

Though categorized as a consumer staples business, they surpass mere commodity resale by providing value-added services. These services encompass storage, blending, cleaning, heat treatment, processing, and vendor-managed inventory solutions. This diverse range of offerings acts as a barrier, limiting the potential for new entrants to compete effectively.

They maintain rigorous oversight over their product quality by stipulating contracts that require a minimum standard of quality to be met. Their relationships with farmers enable sustainable collaboration and practices that promote sustainable agriculture.

Operating within a modest yet consistent upward trajectory, they function within an environment that is relatively less competitive and experiences gradual changes. The overwhelming majority of Acomo’s offerings are plant-based, delivering several health and nutritional advantages. This has led to a consistent increase in demand for these products.

Competitive Landscape

To gain insight into Acomo’s positioning within the market, let’s examine its competitive standing by evaluating both its moat and valuation in relation to its public competitors. Presented in the table below is a comparison involving dividend yield, free cash flow yield, and market capitalization. Please note that the free cash flow yield is computed based on a favorable year within the cycle. One immediate observation is that among the listed companies, those based in the US demonstrate the lowest dividend yield.

In Singapore, two major players in the agricultural sector include Olam Group (OTCPK:OLGPF) and Wilmar International (OTCPK:WLMIY). On the American front, notable companies within the agricultural industry encompass Archer-Daniels-Midland (ADM), Bunge Global (BG), John B. Sanfilippo & Son (JBSS), McCormick & Company (MKC), and Hormel Foods (HRL).

Click to enlarge

(Compiled By Author From Company Financials)

Amidst the surges in prices experienced by several companies in recent years, particularly with American companies nearing all-time highs, Acomo stands out with its comparatively inexpensive valuation within the sector. With an impressive free cash flow yield of 12.2%, it presents nearly 50% potential upside to align with the sector average.

Acomo’s rich history in cultivating global ties with small-scale producers and establishing supply chains have solidified its position while fostering a prestigious reputation. Nonetheless, the susceptibility to potential bankruptcy among individual clients remains a slight concern. Potential structural imbalances in the supply and demand dynamics within their commodity market could potentially threaten its growth trajectory.

Growth Strategy

Acomo’s strategic path centers on acquiring full ownership of multiple companies in their respective niches, focusing on horizontal expansion through targeted acquisitions of small businesses. These acquisitions are primarily funded by debt. Post-takeover, they consistently reduce their debt in subsequent years before embarking on another acquisition spree. Autonomous growth opportunities are scarce for Acomo, yet their business operates with minimal dependence on significant capital investment.

The revenue growth had been stagnant with flat margins evident until the acquisition at the end of 2020, which triggered a significant surge in their revenues. Following the surge in revenue, there was a subsequent increase in debt, with the current total debt standing at 280 million, equivalent to 4.27 times the free cash flow. This increased debt is accompanied by a rise in inventory. Presently, their inventory stands at 328 million, contributing to a total current asset value of 528 million.

Before the 2020 acquisition, their consistent dividend payout ratio hovered around 80%. Presently, the payout ratio sits at 67.7%, leaving space for the dividend to potentially return to its previous ratio. This adjustment allows the market time to factor in the anticipated dividend growth. However, future reductions in debt will likely impact the dividend payments downward. Notably, the 2020 acquisition also resulted in a significant 20% increase in outstanding shares.

A crucial point to highlight is Acomo’s earnings positive correlation to commodity prices, such as the price of pepper. Acting as an intermediary between producers and the market, they tactically delay selling until the market price sufficiently surpasses their fixed contracted cost, allowing them to maximize profits.

The black pepper price chart has a substantial correlation between Acomo’s EPS and dividend payout. The current price remains approximately at $3 per kilogram.

Risks

Relying on soft commodity prices exposes them to volatility, yet their consistent earnings history indicates this might not present an immediate risk. Moreover, this reliance also grants them the capacity to easily reduce debt, despite the initial appearance of higher debt following the recent acquisition. Their minimal capital expenditures greatly contribute to overall risk reduction, a positive business aspect.

With a P/E ratio of 11, slightly inflated due to a relatively weaker business performance in the first half of the year, there’s a degree of safety margin. However, during a recession, the share price could potentially decrease significantly. In 2009, the P/E ratio dropped to nearly 5. This could cause disruption and might result in the removal of dividends, but it’s a consistent risk faced by nearly all businesses.

The 35% decline in share price since 2022 can be attributed to several factors. The arrival of a new CEO has sparked concerns in the market about the possibility of maintaining the same strategies without any announced changes. Additionally, the recent increase in debt following an acquisition is still undergoing processing. However, over the past twelve months, the company managed to pay down 100 million in debt while continuing to distribute dividends.

In my view, the somewhat weaker business performance in the first half of the year has opened up an opportunity to enter the stock. It’s accepted that their business experiences a certain level of volatility. The fact is, despite these minor uncertainties, investors are currently offered a 7% dividend yield while waiting for these issues to be resolved.

Valuation

As the company’s debt nears maintenance levels, its strong free cash flow position assures the sustainability of future dividend payouts. With a P/FCF ratio of 7.5 and a generous 7% dividend yield, the company seems undervalued, prompting the question of just how undervalued it truly is.

Observing the return based on an assumed continuation of the 80% payout ratio seen in the first half of the year, Acomo appears fairly priced for an estimated 11% return, without factoring in any possible growth.

Moreover, if the company continues its trend of reducing debt, there’s an anticipation that the market will likely reprice it, leading to a lower dividend yield and a P/E ratio expansion, similarly to the 2010-2015 situation.

Conclusion

At its current valuation, I see Acomo as a solid defensive stock worthy of inclusion in a list of such stocks. With no substantial macroeconomic disruptions anticipated, and factoring in its market cap of €500 million, Acomo is positioned for an 11% return. Furthermore, there’s the added benefit of potential P/E expansion while waiting, making it an appealing option not just for passive income but also for potential capital gains in the future.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.