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CFA Institute Research Challenge Hosted by CFA Society Romania Babeș-Bolyai University of Cluj-Napoca

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CFA Institute Research Challenge Hosted by CFA Society Romania Babeș-Bolyai University of Cluj-Napoca CFA Institute Research Challenge hosted by CFA Society Romania Babeș-Bolyai University of Cluj-Napoca The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was prepared in compliance with the Official Rules of the CFA Institute Research Challenge, is submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report. Disclosures: Ownership and material conflicts of interest The author(s), or a member of their household, of this report holds a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or a director The author(s), or a member of their household, does not serve as an officer, director, or advisory board member of the subject company. Market making The author(s) does not act as a market maker in the subject company’s securities. Disclaimer The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Romania, CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock. This report is published for educational purposes only by students competing in The CFA Institute Research Challenge BABEȘ-BOLYAI University, FSEGA Research 2020 Stock exchange: BSE Sector: Food & Beverages Current price: RON 25.80 Ticker: WINE Industry: Beverages Target price: RON 31.87 Date: February 19, 2020 Sub-industry: Distillers & Wineries Upside: 23.53% Recommendation: BUY INVESTMENT SUMMARY Table 1 We issue a BUY recommendation with a 1-year target price of RON 31.87 representing a 23.5% upside Market snapshot from the closing price of February 19, 2020. Our target price is derived from a mix of Free Cash Flow to Closing price (RON) Firm Model (FCFF) and relative multiples valuation (P/E and EV/EBITDA), attributing equal weights to February 19, 2020 25.8 each methodology. Our recommendation is based on the following key drivers: 52 weeks high (RON) 25.8 Wine industry poised for growth amidst consumption-led economic growth 52 weeks low (RON) 18.2 The latest estimates of the European Commission put Romania as runner-up in terms of economic growth with a steady 3.8% GDP growth projection. With consumption being the chief driver of the GDP Trading volume (6 months) 3,074,231 pace, it will set up an encouraging environment for the growth in the Food & Beverages Industry. As a Outstanding shares (m.) 20 matter of fact, according to the figures provided by Euromonitor, the wine industry in Romania has Market Cap. (m. RON) 516 grown by 7.2% during 2013-2018 and it is expected that it will brisk up its pace in the future. Also, our P/E 11.56 survey conducted on the local market highlights that wine is the main alcoholic beverage preferred by Source: bvb.ro, Reuters close to 67% of our respondents. Profitability above industry levels Fig. 1 Relative share price performance Purcari Wineries managed to significantly improve its performance over the last 5 years, achieving a net profit margin above industry levels: 22.6% vs 8.8%. We assume that the Group will be able to keep higher profitability ratios given its costs advantages stemming from the favourable geographical positioning (the Republic of Moldova and Romania). These countries create the perfect environment for a wine producer: rich soil and less expensive labour force. Moreover, these advantages enable the producer to focus on premium products and earn its spot on the international competitions among world-renowned wines. More than 40 countries under the company’s umbrella WINE BET FTAWEU In the search for beating a path to wine tasters’ door, the company exports to more than 40 countries across the world. The lion’s share of the Group’s sales is represented by Romania with 41%, followed Source: bvb.ro, Reuters by Moldova and Poland with 23% and 10%, respectively. Speaking of Poland, seizing the not fully *FTAWEU – FTSE International All-World exploited niche of the Polish market, we assume the Group will try to replicate the development model regional Indices – Emerging Europe applied for Romania. Going the extra mile with an experienced team On top of revered vineyards, the company boasts with an experienced team which we perceive to be one of the Winery’s biggest assets. The BoD members as well as the executive team have valuable insights in various fields spanning from oenology, finance to marketing and entrepreneurship. Also, Victor Bostan, founder and CEO of the company, has over 35 years of experience in the wine industry and managed to build a dedicated team. Bucharest Stock Exchange promoted to emerging markets The promotion of Romania from Frontier market to Secondary Emerging Market in September 2019 according to FTSE Russell will most likely attract new capital inflows. We view it as a favourable background for the WINE’s price to continue its uptrend. On top of these, another incentive for investors is the Group’s dividend policy: a commitment to pay out 50% of the net profit. 710 RON 34 Horizon Capital returns RON 33 610 Announcement of to back Purcari RON 31 Wineries the Emergency RON 30 510 Governmental Horizon Capital seals 3.3x RON 28 Ordinance return exiting WINE 410 114/2018 Final Dividend for the year RON 27 2018 declared; RON 25 Thousands 310 Appointment of Victor Volume RON 24 Arapan as Executive 2018 Earnings RON 22 210 director Closing price guidance RON 21 110 Equity Buyback Q3 2019 results RON 19 Plan for 200,000 RON 18 10 shares RON 16 1 This report is published for educational purposes only by students competing in The CFA Institute Research Challenge BABEȘ-BOLYAI University, FSEGA Research 2020 HIGHLIGHTS Recently appointed COO committed to the Company’s growth agenda Mr. Eugen Comendant has joined the management team in May 2019 and brings in a vast experience Fig. 2 Forecasted revenue growth (m. RON) of 15 years in both corporate and entrepreneurial environment. He is keen to further implement the company’s expansion plan, which aims at making Purcari a regional leader of the Central and Eastern Revenues YoY growth 600 40% Europe (CEE) as well as at consolidating the highly fragmented wine industry. 30% 400 Acquisitions accretive to earnings 20% The latest acquisitions of Husi and Vismos wineries are expected to strengthen the company’s market share locally. Given the company’s approach to buy assets at below market prices (e.g. Husi assets were 200 10% transferred during its insolvency procedure), we expect it will translate positively into the Groups profitability margins. 0 0% Horizon Capital returns as shareholder 2020F 2021F 2022F 2023F 2024F 2019E 2017A 2018A Horizon Capital became the Company’s shareholder back in 2010. It reduced its participation in the Source: Company data, team estimates February 2018 IPO and completely divested its shares by October 2019, given the lifetime of the fund. After earning a three-fold increase to the investment made, it didn’t last too long until Horizon Capital returned with a USD 7 m. investment via the Emerging Europe Growth Fund III for a 6.8% stake in Fig. 3 Evolution of own harvest Purcari. This comeback is quite a strong sign of investors’ confidence in the Company confirming our vs 3rd party purchase BUY recommendation. 100% 28% 57% BUSINESS DESCRIPTION 56% 65% 3rd party purchases 50% Leading wine player in CEE 72% Self- 44% 35% 43% production Purcari Wineries Plc (WINE) is the top wine player in CEE and one of the most prominent figures of the 0% entire European wine industry. The Group is comprised of 3 wineries (Purcari, Crama Ceptura, Bostavan) and one distillery (Bardar) with a combined surface of 1,392 ha situated in Moldova and Romania (Appendix B-3). The deep roots of Purcari prestigious history date back to 1827. From that moment, Source: Purcari IPO, team analysis wine intensity and complexity have been its perpetual values of quality. The resemblance of the vineyard’s terroir with the one from the well-known French region, Bordeaux brought a high recognition of the brand among famous wine tasters of those times. The company is incorporated under the laws of Cyprus and is listed on the Bucharest Stock Exchange (BSE) since February 2018. Fig. 4 Production capacities Underpinning growth potential 40,000 The Group has become the fastest growing large winery in Romania, managing to triple its market share 30,000 over the last 4 years on the local market. Also, it proves to be the largest exporter of wine from Moldova Kl wine Kl 20,000 and delivers a large variety of wines to over 40 countries in Europe (Poland, Ukraine, the Czech Republic, 10,000 Slovakia etc.), Asia (China, South Korea, Japan), and America (USA and Canada).
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