This week, we take our third look at a Peruvian agricultural company who just posted a record year in sales and profitability. We first reviewed Camposol in November 2013 and again in December 2015. Since our last review, the company has posted Q4 results as well as preliminary results for 2015. The results are nothing short of outstanding. Camposol began the year with a quarter that saw interest expense exceed EBITDA. In Q2 and Q3 2015, EBITDA to interest began to increase to 1.16x and 2.32x respectively. Finally, in Q4, the company registered an astounding 3.18x EBITDA to interest. And Camposol accomplished this feat in the midst of one of the strongest El Nino patterns in recent history (which Moody’s projected would negatively impact the company). In addition, Q4 EBITDA was up 209% over Q4 2014, and also increased 24.1% for 2015 compared to 2014. Much of this increase was due to the company’s decision to increase its blueberry production. In 2015, the company sold an astounding 386% more blueberries than in 2014.
Already the largest avocado grower in the world, the company is on track to also becoming the largest blueberry grower in the world, and 2016 should continue Camposol’s meteoric rise as they are forecasting blueberry production for this year will be 3x the levels in 2015. In addition, the company has forged valuable direct selling relationships with some of the largest, most recognizable food retailers in the U.S. as well as in Europe – names like Walmart, Costco, Sam’s, Kroger and Publix. Consumers continued demand for more fresh and fresh frozen produce means continued growth for Camposol. These thinly traded, difficult to acquired, but very short 12-month Yankee bonds will yield an outstanding 34% if price around 82 or less, and we believe it will make an excellent overweight position in both our FX1 and FX2 managed income portfolios.
What’s Changed – Blueberries and Direct Selling
In the United States, blueberry consumption has nearly doubled in the past decade, due to its designation as a superfood as well as the consumer’s desire to eat fresher, healthier foods. Camposol has cashed in on this growth. 2015 brought record production and profits for the company, in large part to its increasing blueberry production (of which 60% is exported to the U.S.). What started in 2011 as a one-hectare test trial, now dominates the company’s new plantings, making up 80% of its current new plantings. The company originally aimed for just an October to November supply of blueberries in order to fill the gap until Chile starts to produce and export its blueberries. Fast forward to present day, and the company now boasts over 1,000 hectares of blueberries, and is aiming to add an additional 1,000 hectares over the next few years. Peru’s ideal growing climate, which has provided consistent production both in quality and quantity, has extended the company’s harvest from its original two-month window to now lasting from early September to late March. In 2015, this translated to an explosive increase in production and sales, with the company posting a 386% increase in 2015 in the volume of blueberries sold. And for 2016, the company is expecting to harvest 3x the volume of blueberries produced in 2015. This meteoric increase is due to the fact that at the end of 2015, only 274 of the 1,050 hectares of blueberries were producing.
This is great news for Camposol as blueberries are its highest margin product – in 2015, blueberries produced a gross margin of 77.6% for the company. And, all of the additional blueberry production has added handsomely to its bottom line. For Q4 2015, Camposol had record EBITDA of $19.2 million, 209% higher than Q4 2014. Blueberries also helped drive a record year for the company, registering a record EBITDA of $42.8 million, up 24.1% from 2014.
Not only has Camposol done an outstanding job increasing its revenues and profits through its blueberry production, it has also forged valuable direct selling relationships with some of the most well recognized food retailers in the United States and around the world. Through its subsidiary, Camposol Trading, it has established direct selling relationships with 40% of the the top 10 food retailers in the U.S. Last year, 80% of its blueberry crop was sold directly to supermarkets. In fact, the company boasts direct sales relationships with well-recognized names such as Walmart, Costco, Sam’s, Publix and Kroger. Direct selling not only allows its products shorter turnaround time to the consumer, but is also more profitable for the company as it eliminates warehouse and distribution costs. This, in turn, drives significantly higher margins and long-term profitability.
About the Issuer
Camposol began operating in 1997 when it purchased its first land in the La Libertad region located in the north of Peru, 600 kilometers from Lima. Today, Camposol is Peru’s leading agro-industrial company. It is the largest avocado grower in the world and will soon be the largest blueberry producer in the world. Camposol is also the largest exporter of white asparagus. It is involved in the harvest, processing and marketing of high quality agricultural products such as avocadoes, asparagus, blueberries, grapes, mangoes, peppers, artichokes tangerines and shrimps. Its three biggest crops (in terms of revenues) are avocados, blueberries and asparagus. These three crops combined made up 60% of the company’s revenues in 2015. The company offers fresh and frozen products but has recently ceased producing preserved foods. It is the third largest employer in Peru, with nearly 14,000 workers in peak season.
The company has 27,500 hectares between Chao, Virú and Piura; land located in the La Libertad and Piura regions in northern Peru. Just over 9,000 hectares are planted and currently producing. The CAMPOSOL agro-industrial complex consists of six processing plants. Additionally, the Company owns a fruit packing company (mangoes, grapes and others) and participates as partner in a similar operation in Piura.
Camposol had a banner year in 2015, posting not only record EBITDA (as discussed earlier), but record sales and margin. In Q4 2015, the company had record sales of $86.4 million, up 18.4% from Q4 2014, and full year results were also a record for the company, with sales of $289.3 million up 8.1% from 2014. Profits also increased with Q4 2015 EBITDA margin at 22.3%, up from 9.2% year-over-year. Full year EBITDA margin for 2015 was 14.8%, up from 12.9% in 2014.
Last year’s numbers were also improved due to Camposol’s efforts to decrease expenses. For the year, the company significantly decreased its administrative expenses by 13.2% as well as decreased its selling expenses by 19.1%.
In addition to Camposol’s outstanding growth last year, the company has shown excellent growth since 2003. In fact, between 2003 and 2015, the company’s sales had a compound annual growth rate of 15.9%, with sales growing from $49 million in 2003 to $289 million in 2015.
The risk is Camposol’s ability to perform. The company’s move to increase its blueberry production has certainly paid dividends as evidenced by its most recent quarterly results. More importantly, most of the hectares of planted blueberries are slated to begin producing this year, which Camposol’s is estimating will triple its blueberry production in 2016. With demand continuing to increase for this superfood, and the company’s now-established direct selling relationships, 2016 should prove to be an even bigger year for Camposol.
Many of the financial markets have been wary of this bond, due in large part to the still unknown full effects of the current El Nino phenomenon currently affecting many of the nations bordering the Pacific Ocean. While El Nino has affected the volume of avocados and asparagus produced, increasing prices for both have helped to offset the decreased volumes. In addition, many other of Camposol’s products have seen increases in the volumes sold (grapes, mangos, artichokes, and peppers), and the company’s blueberry production has not been affected.
While Camposol may not have been a good candidate to refinance this bond issue in early 2015, the company has shown steady and impressive improvement in each successive quarter over the past 12 months. Indeed, Camposol has stated that it intends to tap the bond market sometime in 2016, to refinance its current bond issue. In our opinion, a company that is showing steady improvement, with good interest coverage and a forecast for a robust year, should have no issues securing bank support for its bond refinancing.
Summary and Conclusion
Looking at the current significant discount on this bond, it appears the markets had already passed judgment on Camposol’s near future in large part due to the El Nino weather pattern forecasts. However, it appears that pundits may have overlooked the company’s blueberry production, which is slated to become its leading product in 2016, or the higher prices that Camposol was able to realize as a result of it being less affected by the weather than its competitors. With 2015 already in the books as a record year for Camposol, 2016 should provide even more robust growth considering the company’s blueberry production is slated to triple this year. These bonds offer investors an excellent diversification opportunity with a growing and well-managed agricultural company who is poised for extraordinary growth. Consequently, we see these extremely short, 12 month, high cash flow bonds, with a current indicated yield of 34%, as an extremely unusual opportunity to overweight Camposol’s position within our global high yield fixed income portfolios, Fixed-Income1.com and Fixed-Income2.com.
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Issuer: Camposol S.A.
Price Target: 82.0*
Yield to Maturity: ~34%
Disclosure: Durig Capital and certain clients may have positions in Camposol 2017 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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