UK-listed Stock Spirits reported a sharp drop in net profit for 2015 on March 10, as it continues to struggle to stem a loss of market share in its biggest market of Poland.
The deteriorating financial performance of the Central European-based distiller likely will prompt further speculation that it could be the target of a hostile takeover bid. While the company claims to be surprised by the recent reports in the local press about any such investor interest, its raising of the dividend for 2015 despite the lower profitability appears to be a defensive move.
Stock Spirits’ net profit in 2015 fell to €19.4mn, a further decline after income dropped to €35.8mn in 2014. A hike in Polish excise tax at the start of 2014 kicked off the tough times for the company in its biggest market; increased competition has now driven its market share there down around 8pp to 30%.
However, Stock Spirits CEO Chris Heath insists better times are on the way, pointing out that most of the damage was done in the first half of the year. In July-December profitability grew year on year, he tells bne IntelliNews. He also notes that the company performed well in most other markets, especially the Czech Republic. It also operates units in Italy, Slovakia, Croatia and Bosnia & Herzegovina.
Yet there’s another hit on the horizon. The Polish government plans to introduce a retail tax this year. Although the parameters keep shifting, that’s a clear threat to producers and distributors.
“We have various scenario plans, but while the proposals keep changing it’s hard to say what the impact will be,” Heath says. “We expect the majority of the cost will be passed to consumers, but it’s worth noting the [Polish] economy is strong and consumer confidence high.”
Despite the uncertainty, the company said it will propose a sharp rise in the dividend. Management will propose a final dividend of €0.0455 per share, offering a total 2015 dividend of €0.058. That is a 55% increase on the 2014 payout.
Josef Nemy at Komercni banka wrote in a note to investors that the market will be “especially appreciative of a higher dividend, which could increase the attractiveness of the company”.
That suggests the move could be an attempt to defend against reported purchases of its shares by Louis Amaral – owner of Eurocash, which operates a large Polish wholesale and retail chain and is therefore a major Stock Spirits customer – and Slovak investor Pavol Krupa.
Amaral began buying Stock Spirits shares in November, when the company lowered its guidance for 2015 results, producing a sharp slide in its stock price. The Portuguese is now the single largest investor, having amassed 9.7% of the company's stock, and there is unconfirmed speculation that he is eyeing a bid to take a majority. The ownership structure of the company is fragmented, with several investment funds holding below 8%.
Heath claims to be amazed by the speculation, and is keen to point out that Amaral’s purchases have been in a personal capacity, via Western Gate Private Investments, and are not linked to Eurocash. Stock Spirits has “seen no change” in its relationship with the wholesaler and retailer, he says. “We treat him the same as any other important investor.”
Krupa may be an even more dangerous suitor. The Slovak billionaire often refers to himself as an “activist shareholder”; the Czech press has called him a “raider”.
Krupa told Czech newspaper Hospardske noviny in mid-February that his vehicle Arca Capital has been buying up Stock Spirits shares on the open market, and that it is also talking to large shareholders.
The plan is to secure a 5% stake in Stock Spirits in order to gain boardroom influence, he added. He has suggested the company’s struggles must be either the result of incompetence or corruption. Stock Spirits trades at a large discount to peers, analysts note.
Krupa claimed in February that Arca is about to call for a probe into the company by financial authorities in three countries. He also said he is seeking to move the company headquarters out of London and split up the wider company.
However, Heath says he has no information on Krupa. “We have not been contacted and he does not appear on the shareholders register,” the CEO says. “As a UK-listed company, we would be legally bound to report any approach to the market.”
“We will not be distracted by such speculation,” the CEO claims. He admits that directors have also been busy buying up Stock Spirits shares, but insists that is simply because they see the stock as undervalued since the November slide.
However, if there is any truth to the claims that Amaral or Krupa are eyeing the company, the weak results won’t make a defence any easier. By midday trade on the London Stock Exchange, Stock Spirits share price had dropped around 3.7% to £142.75. The company floated on the bourse at £226 in October 2013.
The company’s main weapon appears to be its cash-generating capacity. On top of the dividend hike announced for 2015, its chairman David Maloney said in a statement that the board may increase the dividend further in the future to distribute surplus cash to shareholders.
Turning Stock Spirits into a strong dividend play could do the trick, suggests Petr Bartek at Erste Bank. The company “will likely pay additional dividend in the case it is not able to find meaningful acquisitions in the near term. We thus continue to see [Stock Spirits] as solid value play, which is traded with significant discount to peers and offers [a dividend yield of over 3%].”
That will only happen, however, if the company continues to struggle to find M&A targets to grow the business, Heath stresses. Management expressed frustration that it has not yet managed to push any deals through in its current markets.
Heath says dealmaking with owners that overprice their companies has been so difficult in Central Europe that Stock Spirits will now expand the hunt. The company will now try to spend its money in the Nordic countries, Baltics and Balkans also.
“We don’t want to sit on a pile of cash,” he says. “Our first priority is to grow via M&A, but if in the next six to nine months we don’t have a deal on the way, then we will look at returning some of it to shareholders.