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Alliance One International, Inc. Message Board

  • peristentone peristentone Jul 14, 2009 1:14 PM Flag

    Analysis of UVV and AOI

    Is there someone here who can give us a quick elevator speech on challenges and opportunities for UVV and AOI? I was not able to find any analyst reports on these, so in spite of large institutional ownership they don't seem to have wide coverage.

    What little is obvious to me is that tobacco use in the U.S. is on the decline, and tobacco use internationally is probably still rising. How do UVV and AOI participate in that dynamic? What percentage of their sales are domestic and international?

    Are there any legal liabilities for the wholesalers like UVV / AOI, or is all of the liability just at the retail level?

    Are all of the major tobacco manufacturers buying from UVV / AOI or do some of those have vertically integrated operations and bypass the wholesaler entirely?

    UVV had a huge sales decline back in 2007. Was that a spinoff or sale of part of their property? Can someone summarize what that was about?

    Comparing UVV against AOI, which is better and why? Are there any other major players in this business?

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    • How do you determine the convertible buyers have finished establishing their hedges?

    • Almost ready to rumble. The short hedge is about complete.

      -SH

    • P.S., I see they announced the intent to finance on 6/22. I still don't understand why the 2012 bonds didn't trade after that announcement.

    • Yeah, I saw that after posting. I have another thread up here asking for the CUSIPs of the two new issues.

      What I don't understand is why the old bonds stopped actively trading prior to the announcement of the new financing. The last trades I see on the old bonds are between 6/20 and 6/22 where the new financings are announced on 6/30. It's also pretty suspect that the 2012 bonds all traded up above par in mid-May. Was the refinancing public information before the 6/30 information? One gets the feeling it was information to anyone paying more than $100 per bond in middle of May.

      I'm still encouraged by the overall transaction because it shows responsible financial management to be refinancing these bonds more than two full years before they are due.

    • Can you expand on this? I see the convertible debt they issued with conversion around $5, and there is about $100M worth of that. Are there warrants on top of that debt?

      Your point is that price appreciation would be capped significantly at prices above $5 because of the conversion?

      Is anyone worried about those debt holders shorting the stock as it approaches $5? If they short around $5, they have a hedged investment where exercising the debt conversion would cover any losses on the short.

    • Return on equity is how much they EARN. What does that have to do with where anyone will push a stock price? stockholder equity is a constant for any stock price.

      Not sure your post makes any sense.

    • i WILL HAVE A GO!

      Challenges/opportunities- no one expects total smoking to rise much long term. However, China is the biggest smoking market in the world, far bigger as a customer than MO and BAT put together. The growth opportunity is to replace Chinese state supply with internationally traded supply. AOI and UVV are the only very significant players in the internationally traded segment. (BAT has a dealer but supplies to BAT).

      You are right about the general trend in smoking- all Western countries in decline (= all high quality high price markets) but total smoking still rising globally at a very slow annual rate. AOI are the key suppliers in all markets except China, where the state monopoly is the dominant supplier.

      So far, there has been no medical litigation risk to the wholesalers like AOI and UVV.

      BAT is vertically integrated and the recent acquisition of Tribac by JTI might mean they are looking to go the same road. It's mysterious behavior really. Tobacco is a relatively small part of the cost of a packet of cigarettes but clearly it is essential and it comes from volatile countries like Zimbabwe so security of supply is a worry.

      I guess the sales decline is when UVV sold off their non tobacco businesses in nuts, timber, tea etc. For both companies, USA went to a contract farming structure a few years ago and turnover dropped a lot as the cig manufacturers statrted to contract tobacco farmers directly and just pay UVV and AOI for factory processing.

      AOI and STW merged in 2005 to become nearly the same size as UVV. That addressed their main weakness- tobacco dealing is basically a volume related game selling an unbranded product. AOI also took that opportunity to get out of a lot of markets in Europe etc tha depended on Government subsidies to survive. It should be better placed than UVV strategically as it is bigger in Asia and South America, whereas UVV is dominant in North America and Europe. Until recently however, UVV results stayed good but AOI wasn't delivering the numbers. If AOI has closed the gap at the EBIT level it will do better than UVV because it is far ahead on the strategic curve thanks to the merger, but it's early days to make that statement.

      Ignoring the integrated customer and state monopoly side of things, theere is only one significant competitor, which is called Premium. It's privately owned by people who used to work for UVV or AOI. It is able to operate in the most prfitable markets without being weighed down by the need to have a presence in all significant markets like AOI and UVV. It also spends very littel on things like being on the NYSE, corporate communications, tobacco farming etc so it can make a good return on equity while selling below UVV and AOI price. Customers want a third player because they fear AOI and UVV choosing to compete less fiercely against each other than at present but they also want Premium to do the same things as UVV and AOI. That conflict is unresolved and likely to stay unresolved.

      • 3 Replies to gotasmoke5
      • By the way, since you seem to know the tobacco industry well, what are your top picks for retail tobacco?

        I like the thesis for PM, with mostly international exposure and lower litigation risks. But when I look at the cash flow, it looks to me like PM is borrowing money for the last year to do stock buybacks it cannot afford to do from operating cash flows. This has the effect of propping up the stock while destroying shareholder equity. I love buybacks done from free cash flow, but I hate the idea that they are going to burden the company with debt to buy back stock. That cannot be a good long term strategy for building shareholder equity. Somewhat cynically, I have to wonder is that management just trying to increase the value of its own incentive stock at the cost of shareholders in the long term?

        Any other tobacco companies you like?

      • Great reply and thanks.

        Given the low margins, and low growth, for the wholesalers, and given the low barriers to entry that lets new entrants like Premium come in and create price competition, do you think Tobacco wholesale is even a business worth holding?

        What do you think of the bonds for either UVV or AOI? I'm looking for an appropriate higher yield holding for an older person's income portfolio.

        AOI's bonds had a huge run up in the last month. I see that two of them have potential calls in August 2009. Did something happen in the last month that would make the market think those bonds will be called early?

      • Thanks for a very informative explanation of current circumstances and history of companies. As a stock investor/trader my interest is concerned about stock movement and would appreciate your opinion of potential for stock price appreciation over the next 1 to 3 years. Thanks!

    • Hi again! Great questions. Why don't you telephone the companies yourself and ask them (investor relations). Should you provide your own due diligence, please post after you take your position. That's what I did. Thanks,

      • 1 Reply to peepill
      • Most investor relation departments are trained by lawyers to never answer investor questions with any kind of substance. Most answer every question with a request to go read filings. In general, one gets the feeling they just buy an answering machine and record a rude message rather than waste money on people who do the same thing.

 
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