8 things about Verallia
We’re trying something different today. Instead of the usual long posts, we’re summarizing our investment case for Verallia into 8 concise bullet points, and also attaching a more detailed report for further reading.
$VRLA is our highest conviction stock so far this year. It makes up 6% of our portfolio. We will be increasing to 7-8% on any further weakness.
Verallia makes glass containers for the wine, spirits, and food industry mainly in Europe. Glass can be recycled an infinite number of times without any loss of quality. Consumers have a very high regard for glass as a sustainable and healthy form of packaging.
As a business, Verallia does not need a lot of new capital in order to sustain a high level of growth in earnings. What capital it does need gets reinvested at fairly high returns (>15% ROIC).
The reasons for this are structural. Firstly, because it is uneconomical to transport glass over large distances, competition is mainly regional. Verallia can raise prices without much pushback from customers who tend to be small, fragmented wineries. Most contracts are negotiated annually.
Secondly, the substantial energy expense associated with continuously operating furnaces becomes a fixed cost. This discourages new capacity additions until adequate demand is assured, limiting general capex spend in the industry.
The industry as a whole is undergoing a cyclical slowdown as customers de-stock. Inventories which were built up during the post-Covid boom are getting drawn down at a slower pace than anticipated. This is a temporary problem.
Our base case DCF analysis indicates a fair value of $52 USD, representing a 78% upside from the current price of $29. Pessimistic case is $39. At its average price-to-book of 4.7x, shares would trade at $38.
Current dividend yield exceeds 8%. With good dividend coverage, this level of payout appears safe—maybe not in 2025, but likely in subsequent years.
Risks to the downside come mainly from tariffs on European alcohol from China or the US, and from global warming damaging grape yields.
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