The IPO of M&Z plc

Article #732 by Edward Rizzo - Published Weekly

Last week, M&Z plc published a prospectus in connection with a share offer of 11,550,000 ordinary shares at €0.72 per share which represents 26.25% of the total number of ordinary shares in issue.

Currently, M&Z is owned as to 80% by Paul Camilleri and his immediate family and the balance of 20% by the Agius-Vadala family. Following the share offer, Paul Camilleri and his immediate family will hold 59% of the ordinary shares of the company while the combined stake of the Agius-Vadala family will be reduced to 15%.

The listing of the entire issued ordinary shares of M&Z plc on the Official List of the Malta Stock Exchange is another important part of the development process for the equity market since M&Z would be the first company within the fast-moving consumer goods (“FMCG”) sector. In terms of revenue, M&Z claims to be one of the top three local operators within the sector.

While many investors may not have heard about the name of the company before, they are surely well-aware of the vast array of products which are imported, marketed and distributed by the company. The M&Z portfolio comprises 98 brands from numerous suppliers, manufacturers and distributors. The brand portfolio includes products sourced locally as well as from countries such as the UK, EU and the Far East including brands such as Unilever-owned Knorr, Algida & Magnum Ice-Cream as well as other brands such as Flora, Stork & Chicco to name just a few.

M&Z’s product portfolio is spread across 7 categories namely ambient, chilled, frozen, fresh, ice-cream, baby and kids, and home and personal care segments.

In addition to actively sourcing key suppliers, another growth strategy over recent years has been the extension of the brand portfolio through several successful mergers and acquisitions. This activity has been key in driving M&Z into new product segments allowing it to increase and diversify its product offering. In 2014, the company strengthened its portfolio of frozen and ice cream products as a result of the acquisition of the business of Poultry Products Limited (part of the Edible Oil Group of Companies) which at the time distributed part of Unilever’s range of frozen products, including leading ice creams. In 2016, M&Z expanded its offering of home and personal care products through the acquisition of the portfolio of FMCG products distributed by V&F Portelli & Sons Limited. Brands acquired through this acquisition also allowed the company to establish its presence in the market for children’s food products. At the end of 2020, M&Z was granted the distribution and marketing representation rights for the Chicco brand specialising in mother and baby care, following a competitive pitching process. Moreover, M&Z recently concluded negotiations for the acquisition of Red October which will allow it to venture into another product category namely wine, confectionary, spirits, and tobacco segment.

M&Z continues to regard this M&A strategy as a key growth driver in order to penetrate new market segments and continue strengthen its position within existing segments. In fact, M&Z states in the prospectus that it is in exploratory discussions on further potential acquisitions of brand representations.

Moreover, as part of its expansion plans M&Z is exploring opportunities to enter new markets outside of Malta, both directly through its own representative office and indirectly through third parties via representation of its current brand portfolio as well as new brands catering to local tastes and preferences.

Over the past two years, M&Z’s financial performance proved resilient as it faced significant hurdles posed by the pandemic as well as Brexit. Although COVID-19 created major supply chain and logistical issues, revenues only dropped by 2.2% in 2020 to €21.6 million but these are expected to have rebounded to €22.7 million in 2021 thereby surpassing the 2019 levels prior to the pandemic and Brexit. However, the change in product mix away from the more profitable product categories as a result of the pandemic (including the impact from the slump in tourism, the imposition of restrictions on mass events, as well as the disruptions to the food service industry), coupled with the company’s investments in its organisational setup ahead of the public listing, resulted in a contraction in profit margins.

In fact, M&Z reported a drop of around 20% in operating profit (“EBIT”) and net profit in 2020 compared to the prior year whilst the EBIT margin and the net profit margin eased to 11% and 6.75% respectively compared to 13.5% and 8.34% in 2019. The company reportedly had a very positive performance during the second half of 2021 and is expected to have generated an EBIT of €2.74 million and a net profit of €1.7 million for 2021 as a whole. While the EBIT and net profit are still below the 2019 levels due to additional costs as highlighted above, the EBIT margin and net profit margin improved to 12.1% and 7.5% in 2021 which are reportedly well-ahead of other local operators in the FMCG sector.

M&Z has an asset-light business model which enables the company to generate a high return on equity (26.4% in 2020). The company also has a low level of borrowings which is crucial in its quest to continue its M&A strategy. As at 31 October 2021, the company had a net debt of €4.17 million (when including the €1 million in new bank borrowings taken on in relation to the acquisition of Red October, lease liabilities amounting to €2.16 million and €1.5 million in preference shares).

At a price of €0.72 per share, M&Z will have a market cap of €31.7 million which translates into a 2023 forward price-to-earnings ratio of 16.8 times. The estimated enterprise value (“EV”) of €35.9 million gives an EV-to-EBITDA multiple of 9.6 times.

Given its profitable track record and strong balance sheet with negligible debt, M&Z will continue to distribute regular dividends to shareholders. In the prospectus the company states that it aims for a dividend policy of not less than 50% of distributable reserves in respect of the ordinary shares. However, for the next two financial years ending 31 December 2022 and 31 December 2023, M&Z intends to distribute dividends of not less than 75% and 65% respectively of distributable reserves generated in each financial year. Based on the financial projections disclosed in the Prospectus, this amounts to an estimated dividend of €1.267 million (equivalent to €0.029 per share) in respect of each of the financial years ending 31 December 2022 and 31 December 2023. This represents a net dividend yield of 4% on the issue price of €0.72 per share.

While the two most recent IPO’s in Malta involved the issuance of new shares in order to support ongoing growth, the main aim of the M&Z IPO is to facilitate succession planning while providing a financing tool to encourage further consolidation in the local FMCG sector through M&A activities. Moreover, M&Z is also conducting this public offering in order to strengthen relationships with suppliers and key business partners, encourage shareholder brand loyalty and raise additional brand awareness among local consumers. Hopefully other companies will recognise the important considerations for a public listing to allow the market to achieve further depth and diversification opportunities.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd is acting as Sponsor, Manager & Registrar to M&Z plc.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.