COR:PL     Exchange : EN Lisbon

Stock price: €1.33 
Market cap: €177 million 
Enterprise value : €292 million 
EV/EBIT : 5.6 X 
EV/ 10 year EBIT  : 10 X


It’s one of Nature’s amazing raw materials: light, water proof, fire resistant, pliant and yet durable.

Cork is actually stripped from the trunk of the Cork Oak. 
A natural wonder, as its harvesting doesn't injures or kills the tree. And Cork oak trees have an average life of about 200 years. In fact, the World Wildlife Fund points to cork production as a means "to preserve the precious and beautiful woodlands that have uniquely clustered in the western Mediterranean for millennia."

                                                       THE CORK OAK

Cork is used in a variety of products. Like:

• Wine stoppers (cork stoppers are used in over 80% of 20 billion bottles of wines produced each year)
•   Floor and wall tiles
•  Insulation
• Other building materials
• Insoles of shoes , musical instrument parts, shuttle cocks  etc
• Automotive industry (gaskets, meters, valves etc)
• Gaskets for electric and gas equipment.
• Acoustic and anti-vibratic insulation (construction, railways)

And Cork trees are found in abundance in Portugal – which occupies   the foremost position in cork production and exports.

On a worldwide scale, the cork forest reaches approximately 2.277.700 hectares.

And in Portugal, the cork forest occupies over 730 000 hectares. That makes approximately 32% of the total plant area.

No wonder Cork exports represent about 30% of the total Portuguese forestry product exports. (source : apcor cork yearbook 2011).

And the leader of cork industry in Portugal is the company called
Corticeira Amorim.

Amorim was founded in 1870 with one single utility to produce traditional cork stoppers specifically for Porto Wine. 

After few years the company started producing various cork products and exporting them to over various countries across the globe.

Today It exports cork products to over 100  countries in the world.

More than 80 % of its sales come from outside Portugal.

Below is the graph showing their consolidated sales by geographical areas
(source :2011 annual report)

Amorim is structured into 5 business units:

1 Raw material 

The Raw Materials Business Unit ,  as Amorim’s website points out  “brings together the management of purchasing, storage and preparation of the single variable common to all of CORTICEIRA AMORIM’s activities – Cork.”
It also focuses on Research and development. And  as we will see later this unit strengthens the competitive advantage of the whole company.

2 Cork Stoppers               World Market share: 25%

This unit is the biggest contributor to Amorim's total sales.
Amorim is the world’s largest supplier of cork stoppers producing over 3 billion units a year. It commands 25% share of the world market. It has established direct relationships with all major wine producing companies. It supplies corks to  famous Châteaux d'Yquem and Mouton-Rothschild, and most of Champagne's biggest names. As wine consumption increases all over the world -as it has over the last few years – it will have a favorable impact on this division’s bottom line. The cork stoppers BU recorded a sales growth of 9 % in 2011. And EBITDA growth of 10 %.

3 Floor and Wall coverings       World market share: 65%

According to Amorim , the floor and wall coverings produced  by this unit constitute a unique sales proposition in themselves as they are easily and rapidly installed , comfortable , durable, environmentally friendly and healthy as surface finishes do not retain dirt. Sales of this unit increased by 6% and EBITDA by 63% compared to the previous year.

4 Insulation Cork                       World market share  80%

According to their website the “The unique characteristics of the product grant it a high degree of thermal, acoustic and anti-vibratic insulation. For this reason it is used in the construction of oil  pipelines, airports, buildings, wine cellars and the refrigeration industry, as well as spaces dedicated to leisure activities.Sales of this unit fell around 6% and EBITDA fell around 10%  this year due to adverse economic climate.

5 Composite cork                   World Market share  55%

Its products are used in the areas of Gaskets and Materials for Automotive and Heavy Duty applications, Electrical Transformers
Natural Gas applications (Gas Meters and Water Heaters), Thermal protection shields, Expansion/Contraction joints, Home and office accessories and Footwear components .
Sales of this unit increased 6 % and EBITDA increased around 9%.

Below is the table taken from their 2011 annual report showing consolidated sales by their business units:

And here is the 10 year record.

Sales growth has roughly tracked inflation. Gross margins have been consistent . It enjoys a good pricing power. But EBIDTA -capex margins have been wobbly. Capex  has been almost same as depreciation and takes away 30 % from EBITDA .  SG&A expenses are very high. Staff costs alone in 2010  were 94 million euros.  

Amorim's earnings are backed up by positive operating cash flows . But free cash flows have been extremely erratic. That's why EBIDTA - CAPEX  (which roughly equals EBIT) has been used as a measure for earnings.
Earning power  would be around euros 30 million .

Amorim's cash flows ( in million of Euros)

Return on Capital Employed

Amorim's return on capital employed is unimpressive .

(all figures in million of euros )

The first thing we notice from eyeballing the table above  is that they have to hold lots of inventories and that lowers their ROCE . As we will see later, that's one  price they pay for having and maintaining their competitive advantage . During the recent 2 years ROCE  gets a boost from high account payables.
Unlikely  to be called a normal ROCE.
 Factors  that contribute to low ROCE are low capital turnover  and tiny margins. A good quality company can afford to have low margins and  a very high capital turnover or high margins with  low capital turnover to get a satisfactory return on capital. Amorim has a low capital turnover and low margins.It's not an extraordinary business.But it's not a 'cigar butt' type of business either.

But then this kind of  somniferous record  won't attract competition.

 Return on tangible equity

Du-pont analysis breaks ROE into 3 components .
Assets turnover, profit margins and leverage.

Return on equity =  Profit / equity  or

Return on equity = ( sales/assets) * (profit/sales) * (assets /equity)

Below is a Du-pont analysis on Amorim:

Again it's a mediocre record.  It is unable to deploy its earnings to get high returns.

Running Du-pont on Amorim  reveals that return on equity gets a boost from leverage ratio which  has been consistently above 2 . It has to resort to debt. 

Balance sheet

Tangible book value amounts to 2.08 euros . The stock trades below its book.

Current ratio stands at 1.9 which is fine.

Debt / Equity (tangible) ratio stands at  ~ 0.65

Usage of commercial paper has  been declining which is a good thing.
In 2006 it was euros 85 million which has come down to 21.7 million in the latest balance sheet.

Debt stands at  euros 151 million which  5X normalized EBITDA- cap-ex.

Dividend History

Amorim recently paid dividend of euros .065 per share .

They paid a dividend of euros 0.10 in 2010 .
No dividend was paid in 2009 but that was good as debt was reduced.
It paid euros  0.06 per share   in 2008 , euros 0.06 in 2007, euros .055 in 2006  and .05 in 2005.

Corteicera  Amorim is an eponym  for  AMORIM Family which owns about 76% of the stock . Various members of the family serve on the board.

Amorim's competitive advantages

Amorim’s enjoys numerous competitive advantages.

Amorim has direct presence in the countries that produce the raw material – affiliates (all situated in the cork forest zones) in Portugal, Spain, Morocco and Tunisia, allowing diversification of sources and control of the flow of the raw material and has a direct presence in all the big wine-producing countries – France, USA, Australia, Italy, Spain, Portugal, South Africa, Chile, Argentina, Germany.

Its sales and after-sales service are integrated in such a way as to assure a high level of service to clients and the capacity to respond rapidly to their needs.

It boasts of a diversified portfolio of high quality products that cater to all wine segments all over the world. Amorim benefits from- as its annual report states- “unrivalled distribution network” .

Management knew to build a competitive advantage they would have to focus on building an extensive network of distributors.
 This wide  mesh of distributors enables the company to understand exactly what the market wants. 

According to the director of the company :

Competition is not able to offer such portfolio of products in so many countries and that clearly makes the difference”

One concern , however , is the usage of alternative  wine stoppers.
This is a long running debate : cork or screwcaps .
Around 2005 , the market share for cork wine bottle closures started falling from 95% to around 70% globally. Many  wine producers across the globe-especially in New Zealnd- started giving up cork, replacing it with screw caps.

The main culprit: Cork Taint due to TCA. Some corks had become infected by a mold by-product called 2,4,6 trichloroanisole (TCA). The taint distorted the taste of some wines and angered wine consumers. Cork producers did not address the problem and instead started putting more money into PR rather than into research.
Carlos de Jesus , the Director of Communications for Amorim said:

"We messed up. For too long we denied the problem and fought a PR battle, when we should have been addressing the issue of TCA."

 AMORIM acted decisively and developed  a technology called ROSA. Rosa- named after one of the Amorim family's daughters- is a proprietary cork-cleaning process developed after three years of research, that reduced releasable TCA levels in cork by as much as 82%. 

Carlos De Jesus admitted :

"Market share has fallen from 95% to 72%.We've paid the price for our past mistakes." . But companies like Amorim took action .
 Cork quality is much better, and much more reliable than it was just five or six years ago.

"Today, 70% of winemakers have chosen cork over screw-caps or plastic wine stoppers," says Carlos de Jesus.

Thanks to investment in R&D which was instrumental in recovering the market share. check this link.

Despite the dominant market share management is still working towards fortifying the company's market position.

Recently, Amorim acquired a 90.9% stake in Trefinos, a Spanish manufacturer of champagne cork stoppers.

The company is mentioned in the book Hidden Champions of the Twenty-First Century: The Success Strategies of Unknown World Market Leaders by Hermann Simon.

Basically hidden champions are medium-sized, unknown companies that have quietly, under the radar, become world market leaders in their respective industries.

Amorim perfectly fits the bill. 

 But it's trading at an  EV/10 year EBIT  of 10 X which is a better gauge of its earning power. And that's not that cheap considering its below average return on capital employed and return on equity and free cash flow margins.

I rest my case with the following quote of Warren Buffett :

"I have no use whatsoever for projections or forecasts.  They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be.  We never look at projections but we care very much about, and look very deeply, at track records.  If a company has a lousy track record but a very bright future, we will miss the opportunity"