Nomad Foods stock: Trading with an adjusted FCF yield of 11% (NYSE:NOMD)

introduction

When interest rates in financial markets are low, a “buy and build” strategy based on M&A makes a lot of sense. Nomad Food (New York Stock Exchange: NOMD), leader Frozen food and frozen food, operate. of course interest rate increase The circumstances of the past few years have also affected the company, with its aggressive expansion plans coming to a screeching halt. This is okay, as it allows the company to further consolidate its efforts and focus on its current product range while also focusing on generating strong free cash flow results, ultimately resulting in lower gross and net debt and lower interest expenses.

This article is meant to be an update to our previous coverage of Nomad Foods, and you can find all 11 related articles here.. We encourage you to read some of our previous articles to better understand the company’s business model.

2023 wasn’t as bad as feared

In fact, I was surprised by the company’s fourth quarter and full year 2023 results. Looking at the last quarter of the year, Nomad Foods reported a 1.4% jump in sales to €761 million and a 3.2% increase in EBITDA. Meanwhile, full-year results included revenue growth of 3.6% to €3 billion, with organic revenue growth of approximately 4.9%. Meanwhile, adjusted EBITDA increased 2%.

If you look at the fourth quarter results below, you’ll see that they actually brought in revenue of €761 million, with a total profit of almost €208 million. Operating profit, excluding other operating expenses and exceptional items, was just under €67 million, an increase of 1.5% compared to the fourth quarter of 2022.

While finance costs increased, net finance costs remained relatively unchanged as the increase in finance costs was offset by an increase in finance revenue. This ultimately resulted in a pre-tax profit of €46.2 million and a net profit of €24.7 million. Based on a weighted average share count of approximately 164 million shares, this corresponds to an EPS of €0.15. Although this is lower than the €0.21 per share in the fourth quarter of 2022, the average tax rate was unusually high in the fourth quarter of 2023 and unusually low in the fourth quarter of 2022.

The full-year results (shown below) show total revenue of just over €3.04 billion, gross profit of €859 million and operating profit of €340 million. Unfortunately, total net financing costs were significantly higher than in 2022 (not surprisingly), with a net profit of almost €193 million.

The reported EPS was 1.13 EUR, based on an average share count of just over 170 million shares. Using the current share count, EPS would be closer to €1.2 per share (or almost $1.30 per share).

The company has always placed a strong emphasis on cash flow, as its sustaining capital expenditures are lower than traditionally reported depreciation and amortization expenses. The income statement also includes stock-based compensation, which is non-cash compensation.

Looking at the cash flow statement (below), operating cash flow is €431 million, but this includes a contribution of €58 million from working capital changes. It also included exceptional items worth approximately €68 million. On the other hand, lease payments of 30 million euros, interest payments of 94 million euros, and interest income of 5.3 million euros were excluded. On an adjusted basis, operating cash flow was €254 million.

Total capital expenditures were €82 million, resulting in a net free cash flow result of €172 million including exceptional items and approximately €240 million excluding exceptional items. Using €172 million, net free cash flow per share was approximately €1.05 using the fourth quarter weighted average share count of approximately €1.13. Excluding exceptional items, free cash flow would have been $0.44 per share higher.

At the end of 2023, Nomad Foods had cash of €413 million, gross debt of €2.14 billion (including lease liabilities), and net debt of €1.73 billion (including lease liabilities). That’s less than 3.5x adjusted EBITDA, so Nomad Foods continues to move toward reducing leverage on its balance sheet.

The outlook for 2024 is pretty good.

Nomad Foods also provided an initial outlook for 2024. The company expects revenue to increase 3% to 4% and adjusted EBITDA to increase 4% to 6%. Regarding earnings per share, Nomad is offering an EPS of 1.75-1.85 EUR per share. This appears to be a significant increase over the reported EPS in 2023, although adjusted EPS in 2023 was €1.61 ​​per share excluding exceptional items. Therefore, an increase to 1.75-1.80 EUR per share is a very reasonable expectation.

Based on the current exchange rate, this means that Nomad Foods is trading at less than 10 times its expected profits. Because maintenance investment is lower than depreciation, maintenance free cash flow should be higher than EPS and adjusted EPS. We believe targeting a sustained free cash flow result of close to $2 per share in 2024 is very realistic given the historical delta between ongoing capital expenditures and depreciation.

Meanwhile, strong underlying cash flow will help the company reduce its gross and net debt levels. Approximately €320 million is expected to be spent on maintaining free cash flow and, considering the company’s current dividend policy is to pay a quarterly dividend of $0.15 per share, used for debt reduction, share repurchases and potentially more M&A. Available free cash flow will be approximately €230 million. . However, I’m not sure we’ll see a lot of M&A happening anytime soon (barring some smaller additional acquisitions) and I think the focus will be on debt reduction. Excluding lease liabilities, net debt is reduced to €1.5 billion, lowering the debt-to-equity ratio to 2.75 times EBITDA (assuming adjusted EBITDA growth of 5% this year, which is the midpoint of annual guidance).

Nomad Foods generally has pretty good visibility into its future revenue and production, so we don’t expect any negative surprises. The primary risk associated with investing in Nomad Foods is a general decline in demand for frozen foods and food supplies. In other words, the economic contraction may actually cause more of the population to prefer frozen foods.

investment thesis

I haven’t been around Nomad Foods for a while, but looking at recent results and the outlook for 2024, the company looks pretty attractive again. I like the company’s focus on generating positive free cash flow results. This is because it is the best way to quickly reduce net debt to the lower end of the preferred range of 2.5 to 3.5 times EBITDA.

I don’t have a position at the moment, but I plan to watch Nomad’s activities in the near future.