What Is Alliance One International’s Fundamental Value?

We estimate that Alliance One International’s (NYSE:AOI) fundamental value is $23.50. We have created an interactive dashboard that shows Alliance One International’s key operational performance, such as segment-wise revenues, margins, EBITDA, and earnings, as well as our share price forecast. You can adjust revenue and margin drivers to see the impact on earnings. Below we discuss our expectations and forecasts for the company.

AOI Generates Its Revenues Primarily From Leaf Tobacco Sales

Alliance One International is one of the largest tobacco leaf suppliers, along with Universal Corporation. The company has a presence in various tobacco leaf producing geographies spread across the globe. It generates its revenues from selling tobacco leaves to cigarette manufacturing companies. It should be noted that Alliance One International and Universal Corporation account for 70% of market share in the leaf tobacco industry. Alliance One International’s stock has been buzzing over the last month or so with almost a 100% jump in the share price since early February this year. In this note we discuss our share price estimate for the company in a top-bottom approach. Below we discuss the revenue estimation for Alliance One International.

Expect Leaf Tobacco Revenues To Grow In Low-Single-Digit In FY 2018

Leaf tobacco sales are driven by two factors — Total Leaf Tobacco sold, and Average Price. The company hasn’t seen much growth on the volume side in the recent years, and it has ranged more or less around 380 Mil Kilos. We don’t expect much change in the volume in the near term and estimate it to be around 380 Mil Kilos in 2018. Looking at the average price, it has been on a decline over the past few years. However, FY 2018, may reverse that trend, given that pricing for the nine-month period ending Dec, 2018, is up 7.5%. We estimate the average price in FY 2018 to be up in low-mid single digits. This would translate into leaf tobacco revenues of $1.68 billion.

Processing Fees Likely To Grow In Mid Twenties

Apart from leaf tobacco sales, the company generates its revenues from processing fees. We use Processing Fees As A Percentage of Leaf Tobacco Sales, as the revenue driver. The same has been on an uptrend over the last few years, and grew from 4.2% in FY 2016 to  5.1% in FY 2017, and we estimate it to be over 6% in FY 2018. It should be noted that the figure currently stands at 6.4% for the nine-month period ending Dec, 2017. Accordingly, the processing fees will likely see a 27% jump in FY 2018.

Estimating AOI’s Share Price of $23.50

To arrive at the company’s share price, we estimate the enterprise value, using an EV/EBITDA multiple. We forecast the company’s EBITDA margin to grow from around 7% in FY 2017 to around 8.7% in 2018. The company’s performance so far in FY 2018 has been much better as compared to the prior year period, with an EBITDA margin of over 8%. This will translate into EBITDA of a little over $150 million in FY 2018. We use an EV/EBITDA multiple of around 6 to arrive at the company’s enterprise value of $921 million. Note that our EV/EBITDA multiple though is higher than FY 2017, it is an average of the last 2 years, and much lower than most of the multiples being used in the tobacco industry. Assuming net cash of -$700 million in FY 2018, the estimated market cap for 2018 comes to $212 million. We use a 9 million outstanding shares figure to arrive at our price estimate of $23.50.

There are certain risks to our estimates. AOI supplies leaf tobacco to cigarette manufacturers, and the demand for cigarettes can be impacted by various factors, such as pricing and packaging, which in turn may not bode well for leaf tobacco suppliers. Increases in cigarette pricing, along with high taxation, may prompt lower volume. Many countries are implementing plain packaging laws which prohibit colorful and graphic branding elements on the cigarette pack, and replace them with graphic health warnings. This, in turn, creates more awareness of health hazards due to smoking, and may result in lower volume going forward. If there is less demand for cigarette in general, the intake of leaf tobacco by the cigarette manufacturers will likely come down, thereby impacting the business of Alliance One International.

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