Opinions
Stephen Takacsy, B. Eng, MBA
Swiss Water Decaffeinated Coffee Inc
SWP-T
HOLD
Jan 25, 2021
They spent a lot of money building a new line in a new location and it is taking a bit of time to commission because of fine tuning and tweaking. They have to move from their old plant in a few years and this is where the challenges is. They will have to fund a second new line at the new plant in order to move out of the old one. You have to be very, very patient in this one.
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agriculture
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BUY
He owns 6-7% of the company. He still really likes it. This is the year we should see some huge growth as they are still in the process of commissioning a brand new plant in BC. They sell all over the world. He expects demand to keep growing. They will have to land one or two big new accounts to really get the new plant going.
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PAST TOP PICK
(A Top Pick Mar 27/19, Down 49%) Their March results boasted record sales and double the volumes over 2019. However, they eliminated their dividend to fund their second line to be installed in a new plant. Investors reacted negatively, were spooked; it looked like the company didn't plan this move. However, SWP enjoys a moat and good global growth. Strong cash flow, so they can fund their capex in three years to build the next plant and/or line. Global demand is still there as are the company's fundamentals. Capex will take place over three years, and they have the money now and to raise the rest.
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PAST TOP PICK
(A Top Pick Jun 03/19, Down 48%) They've grown their sales a lot over 5 years and improved margins. In March, they cut the dividend to accumulate cash to build a second line in Delta, BC, and this stunned the market, because the company had already spent a lot on the first line. Some investors sold. SWP announced it must move out of the old plant within 3 years, which concerned the market. They made decaff coffee without chemicals, and they have no competitors. This market is growing globally; SWP sales volumes keep growing. Horton's is one customer.
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BUY
Still likes it. They just produced their first at their new plant. Their last quarter was a nice surprise, lifted by online sales, though restaurant sales continue to be impacted by the pandemic. A capex worry about how they will finance the move to their new plant; will have to add another production line. Not worried, because of strong demand for chemical-free decaf coffee.
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HOLD
Volumes held up well in 2020. Their challenge is to build a second line, costing $45 million in capex and start-up costs. They already borrowed a lot to build that first line. They will have to raise equity, borrow or both. Wait until this is resolved. Otherwise, it's a great business: great margins and cash flow.
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WATCH
It's a great little business. They had to switch locations for their facility and that cost them. They have one line up and running at that new location. They got good financing for the moving of their second production line. They have a lot of debt, although friendly. Volumes are increasing nicely. You would have to be a really long term investor.
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DON'T BUY
He sold his shares a few years ago, because SWP would need a lot of capital to move their plant (to meet higher demand). The results have been pretty good, but the prices have also risen. Also, they face competition and need more capital to complete further expansion. So, they have taken on a lot of debt. They need to grow the bottom line once they launch this second line of production. They overspend on the first production line; that was their key problem.
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