📈 Corticeira $COR - The World's ONLY Cork Manufacturer
A comprehensive financial walkthrough of the market leader in cork production, Corticeira Amorim $ELI:COR
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About Investment Thesis
Investment Thesis is a series of posts dedicated to providing a foundational understanding of listed microcaps. Additional corollary posts will expand the knowledge base for each investment case. The series aims to achieve a timeless understanding of how a business operates, rather than focusing on specific items related to current events (a separate series covers those). Every month, content on an investment case will be posted in either article or podcast form, or both.
This content is intended for informational purposes only and should not be taken as investment advice. The author does not represent any third-party interest, and he may be a shareholder in the companies described in this series. Please do your own research or consult with a professional advisor before making any financial decision. You will find a full disclaimer at the end of the post.
👨👩👧👦 Origin Story and the Amorim Family
Corticeira Amorim, a company now recognized as a world leader in cork processing, was founded in 1870. The company’s origins are deeply rooted in the entrepreneurial spirit and vision of the Amorim family, who recognized the vast potential of cork, a 100% natural raw material. From its inception, the family business emphasized the versatility and sustainability of cork, establishing its foundational philosophy of:
not just one market, not just one customer, not just one currency, not just one product
Under the leadership of the Amorim family, the company rapidly expanded its portfolio and entered new markets, developing innovative products that positioned cork as a material of choice in various industries. This expansion was driven by a commitment to sustainability and innovation, which included significant investments in research and development. By the 1960s, the company had diversified its offerings and established itself as a major player in the cork industry.
In the post-World War II era, the third generation of the Amorim family identified new business opportunities amid the global economic recovery. This period marked a significant shift for the company, as it began to focus on adding value to cork by utilizing the 70% of waste generated during cork stopper production. This led to the creation of granulates and cork agglomerates for multiple sectors, thereby reducing waste and increasing the utility of cork. This strategy of vertical integration and diversification culminated in the formation of Corticeira Amorim, which later evolved into Amorim Cork Composites.
The 1980s saw Corticeira Amorim significantly increasing its production of cork agglomerates, expanding their application to advanced technological sectors. Cork’s properties, such as thermal and acoustic insulation, fire resistance, and compressibility, made it suitable for use in construction, automotive, and aerospace industries. The growing demand, especially in North America, led to the establishment of a subsidiary in Canada in 1981, laying the groundwork for further expansion into the US market.
In 2007, Amorim Cork Composites was formally established following the merger of various business units. This restructuring enabled the company to consolidate its market position and enhance operational efficiency. In 2018, the company launched the i.cork factory, an innovative pilot plant dedicated to research, design, and development of new cork products and applications. This facility symbolizes the company’s ongoing commitment to innovation and sustainability, continually exploring new processes and technologies to enhance the technical performance of cork.
Throughout its history, the Amorim family has maintained a strong commitment to sustainability. The company’s operations are guided by principles that promote the circular economy, minimize waste, and support good forest management practices. These efforts not only enhance the quality of cork but also contribute to the preservation of cork oak forests and their ecosystems.
Today, Corticeira Amorim remains under the leadership of the fourth generation of the Amorim family, who continue to uphold the values of pride, ambition, initiative, and sobriety. The company’s global footprint extends to over 100 countries, with a diverse product portfolio that serves industries ranging from aerospace to wine and spirits. The enduring legacy of the Amorim family is one of innovation, sustainability, and an unwavering commitment to excellence in the cork industry.
🏭 The Industry
The Natural Cork Council reports that cork is primarily produced in the Mediterranean region, with Portugal leading at 34% of the world's forest area and 50% of production. In 2023, ~200 tons of cork were produced globally. Global cork production is highly concentrated in the Iberian Peninsula. By country, the main cork producers in the world include:
The cork industry supports 30,000 workers and produces about 13 billion wine stoppers annually. Worlwide, wine stoppers account for 72% of all cork revenue.
In recent years, cork production has decreased in major producing countries, but this has been partially offset by increases in countries like Russia and Latin America, which have smaller market shares.
In the US, natural cork usage is growing steadily, with a 7% annual increase and estimated usage of natural corks exceeding 1,200 million in 2023. Cork-finished wines command higher prices and exhibit greater sales growth compared to those with alternative closures.
In the US, the wine bottle market, the largest segment serviced by cork, clearly illustrates cork's value. Consumers are willing to pay up to a 66% premium for cork closures over alternatives. This preference is driven by cork's inherent properties and the cultural perception of cork as a mark of quality.
Despite a general decline in wine demand, influenced by a slowdown in China since 2018 and the impact of COVID-19, the market for cork continues to grow. This is driven by consumers migrating towards more expensive wines, which typically use cork stoppers, and the growth of other beverages such as spirits.
Cork prices are generally stable, but can spike during supply shortages or periods of inflation. These price increases affect Corticeira Amorim's margins, as the cork business does not have the same pricing power as glass and barrels. For instance, Corticeira only managed to offset 50% of the cork cost increase in 2018. Additionally, cork purchased in one year impacts the cost of goods sold (COGS) in the following year when it is used to produce and sell stoppers. Thus, the price increase in 2018 significantly affected margins in 2019 and beyond rather than in 2018.
From 2000 to 2008, cork lost market share, but this trend began to reverse in 2010, with cork gaining market share annually.
Demand and Supply: e.g. Catalonia 2023
The cork harvest season in Catalonia ended with significant contrasts due to drought and a 30% increase in cork prices. On the positive side, rising demand and market prices have boosted interest in cork extraction. However, adverse weather conditions shortened the season, which started late and ended early due to lack of rain and high temperatures. The drought has weakened many cork trees, resulting in fewer leaves and lower overall health.
In 2023, 55-65% of the cork harvested was waste, 2-3% was burnt, 5-10% was pilgrim cork, and only 25% was of suitable quality for making corks or discs. The total production was around 1,800 tons, significantly lower than the 4,500 tons in 2018 and far below the potential 11,000 tons per year, highlighting a gap between supply and demand.
🍾 The Product: Cork
The cork harvesting process, known as descortiçamento in Portuguese, occurs from mid-May to late August during the peak of vegetative activity. This highly specialized process ensures that the cork oak trees are not damaged.
Cork oaks are slow-growing trees that can live up to 200 years, allowing for approximately 16 harvests over their lifespan. The first harvest, known as virgin cork (low quality), occurs when the tree is 25 years old with a trunk perimeter of 70 cm. Nine years later, the secondary cork (good quality) is harvested. Subsequent harvests, called amadia cork (excellent quality), take place every nine years and provide the high-quality cork used for stoppers. It takes 43 years from planting to obtain the first amadia cork.
🏰 Talk about barriers to entry!
Cork Composition
Cork is composed of various materials that impart unique properties. Its chemical composition includes:
Suberina (45%): the fatty acids (feluric, stearic, and felonic) are its main components. Suberin gives cork cells hydrophobic properties, besides protecting it from external pathogens, preventing the evaporation of water, and healing wounds.
Lignin (27%): polymer composed of aromatic alcohols that lend rigidity and impermeability to the cell membrane.
Cellulose and polysaccharides (12%): the cellulose forms rigid microfibrils that make it resistant and not stretchable.
Tannin (6%): polyphenolic substances that bind to proteins, making them insoluble and rot-proof.
Ceroids (5%): fatty acids responsible for the impermeability of cork.
Cork Production and Procurement
Portugal and Spain are the leading global producers of cork, accounting for over 80% of the world's supply. In 2021, Corticeira Amorim purchased cork and cork products worth 292 million euros, with 95% sourced locally from Portugal and Spain. Most of the cork is bought from private family-owned cork oak plantations in Europe, particularly in Spain and Portugal, with around 1,000 active contracts.
Corticeira Amorim also sources cork from North Africa (Algeria and Tunisia), where state-owned forests sell cork through public auctions, a process Amorim describes as transparent.
Market Distinctions
Cork is sourced from two main markets:
Primary Market: Cork is bought directly from cork oak owners who harvest the trees and sell the cork sheets or strips.
Secondary Market: Cork remnants from natural stopper producers are used to manufacture technical stoppers and other products.
Unlike its main competitor, Oeneo, which exclusively buys cork in the secondary market for producing technical stoppers, Corticeira Amorim buys only 40% of its cork from the secondary market. This strategy allows Amorim to secure better prices and higher quality raw materials, enhancing its product offerings and maintaining a competitive edge.
Pricing Power
Cork is harvested every nine years, with the previous cycle occurring in 2008/09. During 2009, demand for cork from producers like Amorim decreased, leading Portuguese farmers to invest less in harvesting. Consequently, production dropped, and by 2018, the number of trees ready for harvest was low. This scarcity caused cork prices to rise by approximately 30% from 2017 to 2018. Although Amorim lacks significant pricing power, it managed to pass on 50% of the price increase to customers.
As the world's largest cork processing company, Amorim holds substantial influence in the supply chain. However, the company must balance negotiation power with long-term sustainability. Cork cultivation is often a supplementary income for farmers, not their primary activity. If Amorim pushes too hard on price negotiations, it could discourage farmers from investing in cork oaks, ultimately harming the industry's future and Amorim's growth capacity.
📋 Business Overview
The chart illustrates the financial performance of Corticeira Amorim from 2008 to 2023, focusing on three key metrics: sales, EBITDA, and EBITDA margin.
We can observe the following trends from the graph above:
Steady sales growth: Despite economic downturns and the COVID-19 pandemic, the company achieved significant sales increases, particularly in the last decade.
Improved EBITDA: Consistent growth in EBITDA demonstrates enhanced profitability and operational efficiency.
Stable and increasing EBITDA margins: The margin improvements indicate effective cost control and robust financial health.
The following is the latest distribution of sales by geography:
Amorim is a pure cork player, a material destined to win due to the trend towards "premium” and ESG criteria, with interesting organic growth potential.
Primarily, it benefits from the growth of premium wine, bourbon, and gin. More artisanal spirits increasingly use cork, and in this segment, there is enormous space to grow since cork lost a considerable part of the wine market between 2000 and 2008 due to alternative TCA-free materials (more on this later). However, cork producers have eradicated the quality deficiencies of cork, which now surpasses synthetic and aluminum stoppers.
Amorim is the leader in its industry, with a 27% market share, where clients are highly fragmented, the largest representing 1% of its sales. In the cork stoppers segment for beverages, it holds a 40% share.
Business Units
Corticeira Amorim's income is not solely derived from cork stoppers; 30% comes from other segments. These areas are more cyclical and have lower margins but are crucial for using 100% of the cork.
Forestal (Raw Materials): This unit handles the entire supply chain of raw cork, ensuring efficient flow and high quality of materials from forest to production.
Cork Stoppers: Corticeira Amorim is the world leader in producing and distributing cork stoppers, used primarily in wine and spirits bottles.
Floor and Wall Coverings: The company provides high-quality, eco-friendly cork flooring and wall covering products, available in over 60 countries.
Composite Cork: This division focuses on creating new cork-based materials by reusing and reinventing cork for various applications, including automotive and aerospace industries.
Insulation Cork: Produces natural cork insulation materials known for their excellent thermal, acoustic, and vibration-insulating properties, contributing to energy-efficient and sustainable building solutions.
The following is the latest distribution of sales by segment:
The following is the distribution of sales by segment since 2008:
The following is the contribution to EBITDA of each segment since 2008:
The following is the evolution of margins in recent years of each business segment (w/ the recent rebranding of Raw Materials as Forestal):
It is important to note that while Corticeira Amorim produces composite cork, insulation cork, and flooring, these are considered secondary products. The company's primary focus remains on its core products: cork stoppers and raw cork material (rebranded as Forestal).
The company’s business units contribute substantially to its overall success. Amorim Cork, the largest segment, leads the market with sales of €759.4 million by producing 5.6 billion cork stoppers annually. Amorim Florestal, responsible for managing the cork value chain, contributes €234.0 million in sales. Additionally, Amorim Cork Flooring adds €92.2 million in sales with the capacity to install 10 million square meters of flooring each year.
Corticeira Amorim operates in a segment with strong growth prospects. Since 2010, the company has been actively recovering lost market share in the wine sector. Additionally, cork benefits from ESG trends, which support its organic growth due to increasing demand for sustainable and environmentally friendly products.
Amorim sees significant potential for growth in the spirits segment, where it currently perceives itself as under-penetrated. The company aims for organic growth of over 10% in this segment. While the wine market is mature and growth is limited, consumer preference for more expensive wines is favorable for cork stoppers.
The group is estimated to sell 300 million stoppers annually to the spirits market, capturing 30% of that segment, although this represents only 1% of Amorim's total production. The spirits market is particularly promising for Amorim due to its higher complexity and demand for more sophisticated cork products, resulting in an EBITDA margin of over 20%.
🤝 Strategic Acquisitions
In addition to its organic growth strategy, the company employs a highly selective M&A approach, targeting recent acquisitions at multiples of 5-6x EBITDA, making them accretive to earnings.
Recent strategic acquisitions include a 50% stake in the SACI Group for €48.7 million and a 55% stake in VMD Group SA for €12.1 million. These moves support Amorim's strategy of leveraging growth opportunities while maintaining a focus on sustainability. The following is a list of acquired companies:
In times of sector stress, such as the Global Financial Crisis (2008-2010), companies within the sector enter or approach bankruptcy, representing a good M&A opportunity for Corticeira Amorim. However, it is not an entirely attractive strategy for the company; they prefer to buy companies that are doing well. Buying bankrupt companies serves to increase capacity quickly, and they prefer to increase it organically.
Significant Transaction: SACI Deal
Amorim reached an agreement to acquire 50% of SACI for an amount of 48.66 million euros. The SACI Group was equally controlled by the Getto and Perlich families. SACI consists of 17 companies that operate in diversified sectors, whose main activity is the production and commercialization of wire wood, with a team of about 340 employees and presence in more than 30 countries.
The most important subsidiary of the SACI Group is Industria Canavesana Attrezzature Speciali S.p.A. (ICAS). ICAS was founded in 1956 in Ivrea by Bruno Getto. Getto aimed to meet the specific requests of the leading Italian sparkling wine producers, creating and developing a high-precision automatic machine to industrialize the production of stopper wires, which had previously been done by hand. ICAS is currently the world's leading producer of stopper wires. Continuous investments in R&D, the use of state-of-the-art machinery, and its highly qualified team support a diversified and technologically advanced range of high-quality and exclusive products recognized by its customers, ultimately providing reliable experiences for final consumers when opening the bottle.
SACI is expected to maintain its identity and autonomy so that its brands can be safeguarded. In the 2020 fiscal year, SACI had 70 million euros in sales and an EBITDA of 10.5 million euros (15% margin).
🧑🔬 Research & Development
Corticeira Amorim places a strong emphasis on innovation, investing €11.3 million in research, development, and innovation (R&D+I) in 2023. This investment supports their technological advancements such as NDTech, a screening technology for TCA-free corks, and the development of cork composite products used in high-tech sectors like aerospace and automotive industries.
TCA
To comprehend the cork industry and Corticeira Amorim’s market positioning, it's crucial to understand Trichloroanisole (TCA). TCA is a compound found in cork that, at elevated levels, imparts a musty taste to wine. If detected in Amorim's corks, customers can demand reimbursement or take legal action. However, Amorim has the capability to analyze and guarantee the quality of its cork products.
At the turn of the century, the prevalence of TCA led to a significant loss of market share for cork as winemakers turned to plastic and aluminum stoppers. These alternatives gained popularity because they eliminated the risk of cork taint. In the early 2000s, approximately 5% of cork stoppers were affected by TCA, causing cork’s market share to plummet from 90% in 2000 to 50% in 2008. In response, Amorim invested between 15 and 20 million euros in R&D to tackle the TCA issue.
Amorim has countered the threat of alternative stoppers by developing new cork-based products and improving their reliability. Today, the prevalence of TCA in cork stoppers has been reduced to around 0.5%, thanks to innovations like technical cork. Technical cork, made from treated cork granules, has driven the resurgence of the cork stopper market.
Amorim offers two main types of cork products:
Technical Cork: Made from treated cork granules with natural cork discs added, creating a robust stopper for the mid-market. Amorim’s technical stoppers contain 80% pure cork.
Natural Cork: Derived directly from cork bark, these stoppers provide an authentic look and optimal characteristics for wine aging.
Currently, about 80% of Amorim’s stoppers are technical, priced between $0.08 and $10 per unit. This blend of natural aesthetics and reliability has been a major driver of cork’s market share increase.
In 2016, after a 10 million euro investment over five years, Amorim launched NDTech, the world’s first high-speed TCA screening technology. This ensures that any cork with more than 0.5 nanograms of TCA per liter is rejected. NDTech guarantees TCA-free stoppers, allowing Amorim to offer a premium product.
Only a select number of stoppers undergo NDTech testing due to its cost, reserved for the most expensive wines. Currently, 80 million out of 5.8 billion stoppers produced annually are NDTech tested.
NDTech has driven 6-8% annual growth in the natural cork stopper line, with these stoppers typically selling at a 10% premium. The average natural cork stopper sells for $0.20. In the wine industry, Amorim is seen as the safest bet for cork stoppers, offering a practically guaranteed problem-free product, unlike competitors who can face significant issues.
♻️ Sustainability and Circular Economy
Sustainability is a core focus for Corticeira Amorim. The company manages 8,181 hectares of cork oak forests and planted over 387,675 cork oak trees in 2023 to promote biodiversity and sustainable forest management. Additionally, they utilize 76.7% renewable energy and have avoided 72,578 tCO2eq emissions through various initiatives. Significant investments in photovoltaic projects aim to meet 20% of the company’s electricity needs by 2024.
The product extracted from Quercus suber, or Cork Oaks, is naturally carbon-negative, offering a compelling reason to continue and expand the use of the material with -112.01g of CO2 per 1,000 stoppers.
Corticeira Amorim's commitment to a circular economy is evident, with 92.2% of the materials used being sustainable and 88.7% renewable.
This dedication extends to community engagement, employing 4,958 workers globally, 70% of whom are based in Portugal. The company invests in community development through educational initiatives and employment programs, enhancing social and economic resilience in the regions it operates.
In 2023, the company planted over 387,675 cork oaks (+233,065 more than in 2022) and plans to plant an additional 250,000 in 2024. These efforts support biodiversity, combat climate change, and ensure a sustainable supply of raw materials. Additionally, Corticeira Amorim has invested in the Herdade de Rio Frio estate to develop a new silviculture model for cork oaks, enhancing forest management practices and sustainability.
A significant aspect of Corticeira Amorim’s sustainability strategy is its shift towards renewable energy. The company has invested heavily in photovoltaic projects, aiming to cover 20% of its electricity needs by 2024. This transition to solar energy reduces the company’s carbon footprint and promotes the use of sustainable energy sources.
The company is committed to reducing waste through zero-waste initiatives. Corticeira Amorim ensures the full utilization of cork material, minimizing waste by using by-products from cork stopper production in applications such as flooring, insulation, and composites. Additionally, the company runs recycling programs to repurpose used cork stoppers and other cork products, further reducing waste.
Corticeira Amorim also emphasizes social responsibility through various community engagement and employment initiatives. It is committed to improving youth employment by 2026, fostering economic development, and providing opportunities for young people in local communities. Furthermore, the Embrace Equity campaign promotes gender equality within the company, ensuring a diverse and inclusive workforce.
The company’s dedication to environmental stewardship is demonstrated through its partnerships and commitments. Corticeira Amorim has joined 24 organizations in the Floresta 2030 Commitment to protect Portuguese forests, showcasing its long-term dedication to environmental conservation. Additionally, the launch of an ESG credit line in partnership with Caixa Geral de Depósitos promotes sustainable practices among cork suppliers.
Innovation is at the heart of Corticeira Amorim’s approach to sustainability. The company continuously develops eco-friendly products, including cork-based insulation materials that offer excellent thermal, acoustic, and vibration insulation properties. These advancements reflect Corticeira Amorim’s commitment to research and development, driving the creation of sustainable and environmentally friendly products.
💎 Hidden Value: Land and Carbon Credits
Land
Corticeira Amorim, the world’s leading cork producer, owns and manages an extensive expanse of cork oak forests, demonstrating a deep commitment to sustainable forestry practices.
Corticeira Amorim's land holdings, acquired over numerous generations, are recorded in their books at the original purchase cost. Many of these properties occupy prime locations near the Portuguese coastline, areas today considered highly desirable and valuable. Given their strategic locations, these lands hold significant potential for appreciation in value.
If Corticeira Amorim ever chose to divest from its traditional business operations, selling this land to developers interested in constructing hotels or luxury residences could potentially yield returns that are three to five times the current assets' book value. This potential for high-value real estate development underscores the strategic advantage of the company's long-held real estate assets in today's market.
Carbon Credits
Corticeira is dedicated to sustainable practices and actively participates in carbon credit initiatives. These efforts align with the company's environmental goals and highlight its role as a responsible industry leader.
The cork oak forests managed by Corticeira Amorim play a vital role in carbon sequestration, absorbing significant amounts of CO2 from the atmosphere. By maintaining and expanding these forests, the company helps combat climate change and supports global carbon reduction efforts.
Cork oak trees are particularly beneficial for carbon offsetting because their bark can be harvested without felling the trees. The bark regenerates, allowing for repeated harvesting, which sustains the trees' lives and enhances their carbon absorption capacity. This cyclical harvesting process significantly contributes to carbon sequestration.
Each new tree helps absorb CO2, generating carbon credits that can be sold or traded in carbon markets.
🤼 Competitors
Taking the cork stopper market as a key indicator of the company's market share, Amorim holds a dominant position, producing 40% of the world's cork stoppers. This equates to 5.5 billion stoppers out of a global total of ~14 billion annually. Amorim's significant lead over its competitors makes it more than twice the size of the second-largest operator, Oeneo, which highlights Amorim's market leadership.
Beyond the leading players Amorim and Oeneo, the cork stopper market becomes increasingly fragmented, presenting ample opportunities for acquisitions and consolidation. This fragmentation allows Amorim to explore strategic acquisitions to further strengthen its market position and diversify its product offerings. The company's ability to leverage its extensive production capabilities and global distribution network positions it well to capitalize on these opportunities, enhancing its competitive edge and driving growth
Similarly, Amorim benefits from a fragmented customer base, serving around 18,000 clients. The largest customer accounts for just €8 million, or 1% of total sales, reducing dependency on any single client. Despite a 15% annual customer turnover, Amorim aims to lower this to below 10% in the coming years by strengthening relationships and enhancing service quality.
Oeneo, Amorim's main competitor with an 18% market share, focuses primarily on agglomerate (technical) stoppers made from cork leftovers. Amorim, however, has a comprehensive presence across all segments, including both technical and natural stoppers. Oeneo benefits from higher margins due to its strong position in the higher-priced French market.
Amorim's advantage lies in its superior diversification across geographic markets and stopper types. Additionally, Amorim is less exposed to the secondary market, where prices are generally lower. The secondary market deals with cork waste from companies, while the primary market involves purchasing new cork directly from cork oak owners. This diversification and market positioning contribute to Amorim's more robust and resilient market presence.
🥇 Drivers of the Competitive Advantage
Corticeira Amorim identifies several competitive advantages that distinguish it from its competitors in the cork industry. These advantages are integral to its business model, scale, and distribution network.
1. Vertical Integration
Corticeira Amorim’s vertically integrated business model is a significant competitive advantage. This model allows the company to source all its cork directly from forest producers, primarily through the primary market. By buying cork in the primary market, Amorim can secure better prices and higher-quality raw materials, unlike competitors like Oeneo, which primarily purchase from the secondary market and tend to pay higher prices for raw materials without segmenting cork prices.
Primary Market Procurement: Ensures higher quality and lower costs for raw materials.
Control Over Supply Chain: Enhances quality control and operational efficiency.
Sustainability Practices: Promotes responsible forest management and sustainability.
2. Scale
Amorim is the largest producer in the cork industry, benefiting from economies of scale that smaller competitors cannot match. This scale not only provides operational leverage but also allows for significant investments in research and development (R&D).
Economies of Scale: Lower production costs per unit due to large-scale operations.
R&D Investment: With more financial resources, Amorim can invest heavily in R&D, leading to innovations such as TCA-free corks. This commitment to R&D ensures that Amorim remains at the forefront of technological advancements in the cork industry.
Quality Assurance: Larger scale allows for comprehensive quality assurance processes that small manufacturers cannot provide, ensuring better product reliability and customer satisfaction.
3. Distribution Network
Corticeira Amorim has a robust distribution network, with 80% of sales conducted through its own teams. The company has a presence in key markets, including Spain, France, Italy, the USA, South Africa, Australia, and New Zealand. This extensive network allows Amorim to stay close to its customers and swiftly detect and respond to market trends.
Global Presence: Ensures proximity to key markets and customers, enhancing customer service and satisfaction.
Trend Detection: The ability to quickly detect and adapt to changing market trends gives Amorim a strategic advantage in maintaining market relevance.
Reduced Dependency on Intermediaries: Direct sales reduce dependency on intermediaries, allowing for better control over sales processes and customer relationships.
📈 Valuation
Corticeira Amorim, an industrial company, experiences margin impacts primarily from two sources:
Raw Material Prices (Price Takers): Fluctuations in cork prices directly affect the gross margin.
Operational Leverage (Price Makers): Efficiency in managing fixed costs impacts operational leverage.
Cork Prices
The increase in cork prices in 2018-2019 directly impacted the gross margin. Additionally, the effects of COVID-19 since 2020 have further influenced the EBIT margin. Here's a graphic showing the price changes of 15kg of raw cork in euros.
Operational Efficiencies
Corticeira has improved productivity, reducing personnel and external service costs as a percentage of sales. Between 2013 and 2018, these efforts saved 100 basis points. Innovations like automatic drilling technology for natural cork stoppers have helped increase efficiency. The number of cork stoppers produced per employee rose from 1.096 million in 2013 to 1.215 million in 2021, an 11% improvement.
High fixed costs mean that during low demand periods, these costs represent a larger proportion of sales. As demand recovers, Amorim's margins improve.
Corticeira maintains excellent working capital management, averaging around 3.5% investment in working capital over sales, due to prepayment for cork for the entire year. In 2017, working capital investment rose to 8% of sales due to an increase in inventories in anticipation of a price increase, positively reducing the impact on gross margin.
DCF Valuation
Using a Free Cash Flow (FCF) analysis, we arrive at a €1.90 billion valuation for Corticeira Amorim, representing a potential 50% upside from its current market cap of €1.26 billion.
Alternatively, applying a standard FCF multiple of 8-12x, which varies based on the company's growth prospects, a 10x multiple yields a valuation of approximately €1.23 billion. This indicates that, at present, the company is fairly valued.
Please note that Corticeira currently offers a dividend yield exceeding 2%, providing a reliable income stream for investors. Additionally, the Amorim family holds 70% of the float meaning investors may need to price in (very mild) illiquidity.
We used the WACC provided by Reuters. The cells highlighted in yellow are averages of the previous 6-7 years.
☣️ Risks
The following is a non-exhaustive list of risks:
Cork Prices: The company's margins are significantly influenced by the price of cork. Fluctuations in cork prices, driven by supply and demand dynamics, can impact profitability. For example, a poor harvest due to weather conditions can drive up cork prices, squeezing margins.
Supply Chain Disruptions: Any disruption in the supply of raw cork, whether due to environmental factors, political instability, or other issues, can adversely affect operations and financial performance.
Economic Downturns: As a global business, Corticeira Amorim is exposed to economic cycles. Recessions or economic slowdowns in key markets can reduce demand for cork products, particularly in discretionary segments like wine and spirits.
Market Competition: Increased competition from alternative closure products, such as synthetic stoppers or screw caps, can erode market share and pressure pricing.
Production Challenges: Issues such as machinery breakdowns, labor strikes, or other operational disruptions can lead to production delays and increased costs.
Quality Control: Maintaining high-quality standards is crucial, particularly for cork stoppers used in premium wines. Any lapses in quality control can damage the company’s reputation and lead to costly recalls or loss of business.
Regulatory Changes: Changes in environmental regulations, labor laws, or trade policies in the regions where Corticeira Amorim operates can increase operational costs or restrict business practices.
Environmental Impact: As a company heavily reliant on natural resources, environmental sustainability is critical. Any failure to adhere to environmental standards or manage resources sustainably can result in legal penalties and reputational damage.
Currency Risk: As an international company, Corticeira Amorim is exposed to fluctuations in exchange rates. Adverse movements in currency values can impact revenues and profitability, particularly when earnings are repatriated to the company's home currency.
Leverage and Debt: High levels of debt can be risky, particularly if the company faces a downturn. Interest rate increases can also raise the cost of servicing debt.
Conclusions
Corticeira Amorim embodies the key traits of a value investing company. As a family-owned business, it has a strong alignment of interests with high management involvement.
The management has proven effective, particularly during the challenging 2000-2008 period due to TCA problems, successfully resolving issues and ensuring a reliable, problem-free product for customers.
Corticeira also holds a near-monopoly in a sector benefiting from ESG trends. Currently, the company faces margin pressures due to increased cork prices and energy inflation.
Once these factors stabilize, Corticeira is expected to return to its intrinsic value, estimated to between 0-50% higher than its current price as of July 2024.
Bonus: 2023 Annual Report Summary
Chairman’s Message
In 2023, the global economy grew by approximately 3.1%, which, although lower than the previous year, was stronger than anticipated. The year was marked by challenges such as geopolitical instability, inflation, and restrictive monetary policies. Corticeira Amorim reported consolidated sales of €985.5 million, a slight decrease from 2022, primarily due to reduced activity in the flooring sector and unfavorable exchange rates. However, there was a significant improvement in EBITDA, with the margin increasing to 18%. The company planted over 200,000 cork oaks in 2023 and plans to plant an additional 250,000 in 2024. Investments in photovoltaic projects are ongoing, aiming to cover 20% of electricity needs by 2024. The company continues to innovate in cork applications, contributing to various sectors. The outlook for 2024 is uncertain but optimistic, focusing on innovation, new market expansion, and profitability.
Corticeira Amorim operates globally with multiple units dedicated to different aspects of cork production and distribution. These include forestry, industrial, and distribution units spread across countries such as Portugal, Spain, the USA, China, and others.
Key Events
In 2023, Corticeira Amorim joined 24 organizations in the Floresta 2030 Commitment to protect Portuguese forests. The company celebrated the 60th anniversary of Amorim Cork Composites, a leader in cork composite materials development. It also committed to improving youth employment by 2026 and launched the Embrace Equity gender equality campaign. Additionally, Corticeira Amorim collaborated with Parsons School of Design to promote cork in design and won the C-IDEA Golden Award 2022 for the SuberDesign Award. The company was recognized by Randstad as one of the most attractive companies to work for in Portugal and undertook various sustainable projects, including a solar park and innovative architectural projects using cork.
Financial Performance
Corticeira Amorim achieved consolidated sales of €985.5 million and net earnings of €88.9 million in 2023. The EBITDA margin improved to 18%. Major investments included planting cork oaks, developing photovoltaic projects, and conducting research and development programs.
Amorim Florestal: Achieved an EBITDA of €23.2 million in 2023, a 7% increase from the previous year, with sales growth primarily in preparation and granulates.
Amorim Cork: Recorded sales of €759.4 million and an EBITDA of €147.7 million, reflecting an increase in sales and operational efficiency.
Strategic Initiatives, Sustainability and Outlook
The company continued to invest in forest management, particularly in the Herdade de Rio Frio estate, to develop a new silviculture model for cork oaks. It also launched an ESG credit line for cork suppliers in partnership with Caixa Geral de Depósitos, promoting sustainability practices.
Corticeira Amorim plans to continue investing in new technologies and applications to maintain its market leadership and expand into new markets. The company is committed to enhancing its environmental practices and supporting biodiversity through various initiatives.
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I cannot stand the related party transactions of the family. My feeling is they use the company like their private ATM.