Too Cold to Buy
We can no longer maintain our once bullish position on G. Willi-Food International Ltd (NASDAQ:WILC). The stock is losing its savoriness. We rate the stock worth a Hold, perhaps even a potential Buy for high-tolerance risk takers, but recent events make us wary of a near-term turnaround in the share price despite our enthusiasm for the company in our last four articles.
Severe headwinds seem to be intensifying. We do not foresee any significant upturn in the near term; the share price dived -25% YTD and -37% over the last 12 months.
Numbers from G. Willi-Food used to be much better. The share price topped $24 two years ago; its 52-week high was $17.61. Our eyebrows were raised when management inflated the dividend yield over the last couple of years and in March ’23 announced the construction of a $24.6M refrigerated and frozen food distribution center. All this happened in the midst of internal financial slumping, and political and business investment turmoil consuming Israel.
Management’s Bad Timing
Some of the blame for the downturn in the share price can be attributed directly to management. They might be rewarding themselves with a better than average, high yield, dividend payout that appears to not be sufficiently covered, in our opinion, by earnings and cash flow. Despite the stock’s struggles, the company ordered a $0.19 dividend on September 7, ’23 resulting in a TTM Yield of 12.76% currently. The yield does not compare favorably to the market average yield of +4% or the food import, export, and distribution industry which is less than 2%.
Willi-Food’s high dividend places the company among the top ~5% of dividend payers in the U.S. market. Its payout ratio almost touches 150% by earnings. They are paying a dividend with no free cash flow to support it. Net income has fallen sequentially since 2019, as has cash from operations and investing. Its net change in cash on hand is negative. Free cash flow was $0.91 in December ’21 and $0.01 in ’22; it is ($0.35) at last report.
Another reason contributing to the stock’s poor showing is a general lack of interest. Fewer than 3K shares are on average traded daily. Management releases little substantive or p.r. information on a regular basis. The scarcity of news emanating from management keeps investors in the dark. We are one of a tiny number of analysts covering G. Willi-Food. Zwi Williger & Joseph Williger, Chairmen & CEO of Willi-Food released Q2 ’23 earnings results on August 30 ’23 with about 150 words of comment on the numbers and outlook. Rarely do they engage in shareholder talks and investor call-ins.
Bleak Past And Future
G. Willi-Food International is an Israel-based company primarily selling domestically. Their host of foods are made overseas. Some are purchased and manufactured by local Israeli producers. 59% of G. Willi-Food is owned by Willi-Food Investments Ltd and insiders own about another 21%. The general public owns just 17.1% of the outstanding shares.
Q2 ’23 was unsettling. Sales in the quarter increased about 5% Y/Y but that may be due to inflation. The gross and net profit numbers tumbled -32.8% Y/Y. The operating profit collapsed, down over 90% Y/Y.
Torrential current events in Israel’s political and business arenas are adding to the share price suppression. Foreign investment was down in the first quarter of 2023 by 60% compared to the first quarters of 2020 and 2022. The Shekel slid to the lowest rate in three years against the US dollar. Israel’s widening budget deficit increased inflation, and interest rates, and is contributing to less consumer spending. Management’s outlook on Aug 30, ’23 was not reassuring; management “hopes” (sic) for better outcomes but we do not expect any positive EPS forthcoming in the next quarterly report:
In the second quarter of 2023, the Company experienced increased prices in the products it acquires and the weakening, by approximately 10%, of the Israeli shekel in relation to the euro and US$ currencies. Those two factors negatively affected the Company’s profit margins… The Company reached its internal sales goals for the second quarter of 2023 and is working hard to improve its financial results by improving the terms of its commercial arrangements with its suppliers and customers. The Company is also looking for new potential markets abroad to sell its products… (W)e hope the demand for our products to increase.
Chew A Bit Longer
Do not spit out the shares of G. Willi-Food International just yet. We cannot predict an end to the political turmoil at this time. However, keep in mind that the current prime minister was finance minister in 2003 when Israel’s economy was in free fall and he turned it around. Observers credited Netanyahu with having performed an ‘economic miracle.’ This champion of free markets is turning his attention again to the finance ministry to bolster the shekel and strengthen the economy.
A second source of potential opportunity is that wages are up and consumer spending on food is up. More supermarkets in our experience are carrying higher quality imported foods which is a good portent for G. Willi-Food.
A third positive sign underlying our continuing interest in the company is the upswing in shares purchased by insiders over the last 3 to 12 months. One caveat, we cannot say with certainty if insiders also sold significant numbers of shares.
The current low price presents a potential opportunity to accumulate some shares following the lead of insiders. After all, the dividend yield is attractive; the company is debt free; there has been past reasonable revenue and earnings growth; and one analyst using The Discounted Cash Flow Model and Gordon Growth Model suggests a fair value for the stock is $12.63. That is about what the share price was meandering around from March through much of July 2023. Adding more support is the 14.98 PE and 0.2 short interest.
The major threat facing investors is the closely held and rather secretive nature of a family of insiders. It is lightly followed and traded but it is operating in a growth environment that is increasingly middle class. They have a taste for higher quality foods like G. Willi-Food sells and at the current low share price, the stock looks a bit tasty.