Stock pick: Ellerston Capital

SIG Combibloc (SWX: SIGN) has been listed for a little over a year and is a global leader in aseptic packaging which is a fancy way of describing the Ultra Heat Treated (UHT) process.  The aseptic packaging market is expected to grow faster than the overall food packaging market as manufacturers need efficient packaging technology and safe supply chains with transparency increasingly expected by consumers who demand assurances on product origin and quality. 

Aseptic cartons enable beverages and liquid food to maintain their taste, appearance and nutritional qualities for up to 12 months without the need for refrigeration or preservatives.

As the chart below highlights, there are two main suppliers of aseptic systems globally, Tetra Pak with 65% market share and SIGN with 21%. Over the past few years SIGN has been increasing its share of the market and we would expect this trend to continue as it builds out its global presence.

There are two main suppliers of aseptic systems globally, Tetra Pak with 65% market share and SIG with 21%

The business model is a unique razor/razorblade approach where SIGN sells its filling and sleeve platform to customers (average 25 year relationships) which are coupled with long term sales contracts of sleeves and closures. This model generates 90%+ recurring revenues, 6-8% top line growth with expanding margins and ROCE >20%.

SIGN has been on our watch list since the initial public offering (IPO) and the recent downdraft in global equity markets provided an attractive entry point into the stock. It is a pure play with a premium margin profile, strong and expanding market position in very attractive and predictable end markets. As a relatively new IPO it will take some time for a proper consensus to be formed while sell downs from its large private equity (PE) holder are closer to the end than the beginning thereby removing this overhang.

We consider that SIGN offers long term durable growth opportunities however if it does not continue to grow its market share or new competition enters the aseptic packaging market this could dampen the investment outcome. Despite these concerns in our view our attractive entry point provides a solid discount to intrinsic value and with a 55-60% payout ratio, a strong and growing dividend stream.

This information has been prepared and provided by Ellerston Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.