- KARE is a debt free, family controlled company with over 100 years history.
- The controlling family have grown market share across Europe and are now present in over 65 countries worldwide.
- Excellent capital allocation has lead to high levels free cash and €260mn on the balance sheet.
- KARE currently sits on a PE which is 50% lower than most established international tobacco companies and has an EV/EBIT of 5.55.
- KARE is based in Greece but derives 87% of it's income from outside the country.
KARE was founded by two brothers, George and Efstathios Karelias, in 1888 when the first generation of the family based in Kalamata sold tobacco in paper pouches to local customers. The company expanded rapidly since the mid 1950’s increasing the variety of well regarded cigarette brands.The Company listed on the Athens Stock Exchange in 1976, trading as the Brothers Karelia. That same year, the company became the official manufacturer of RJ Reynolds (the current Japan Tobacco International) in Greece, with the production and distribution of the Winston and Camel brands. Since the early 1990’s, KARE has evolved from a Greek company to an international group, employing approximately 500 people and benefiting from a strong distribution network for the promotion and development of brands in 65 countries throughout the world. In 1991 the company adopted its current name and in 1994, it founded a business office in Sofia, Bulgaria. A year later the company acquired Meridian SA, which is engaged in the supply of ships with Duty Free products. Since the start of the millennium, KARE has established a subsidiary company in the United Kingdom, to distribute its products throughout the country. It has also founded a subsidiary in Turkey, aiming to strengthen its competitive position among the duty free operators in the country, but also to develop its presence in the neighbouring markets of Central Asia and the Middle East, where there are significant growth opportunities.Today KARE is the largest cigarette manufacturer and the leading exporter of cigarettes in Greece. It is one of the fastest growing independent tobacco companies in the world. The brands are distributed through a network covering 45,000 outlets; it has a presence in close to 70 countries around the world, Western and Eastern Europe, North and Latin America, the Middle East, Africa and the Far East, while 87% of total sales come from overseas.
George Karelias and Sons is the iconic product for Karelia Tobacco Company, since it was the product made by this company in 1888. But what was true about George Karelias and Sons in the 19th Century is still true now: this is a distinctive cigarette product, which offers premium smoking characteristics, which can rarely be found in modern machine-made cigarettes. This cigarette brand, offered in the following two styles, is a real jewel of tobacco industry, packed in royal packs.Karelia Slims is by far the most popular Karelia cigarette, being one of the top-selling cigarette brands in Slims category of European tobacco market. Karelia Slims offer 5 unique flavours.Karelia Super Slims Ome, a recently launched addition to the brand family, and a tribute to all beautiful, self-confident women, who love to smoke, care about their look and demand only luxury products. Packed in cool tiny packs, Karelia Super Slims Ome cigarettes will fit any bag.
KARE is the largest independent Greek cigarette manufacturer with fifth ranking in the market. Its 10.8% share in 2013 has been gradually increasing in recent years. However, it is its international sales which are key to the company, these standing at 14.75 billion pieces in 2014, equivalent to 88% of the company's sales. Next to a 10% market share in Greece, KARE enjoys a 12% market share in Bulgaria, and has a growing presence in Turkey. It is present in many EU countries, with a particularly strong presence in both Albania and Georgia.In 2007 the office in Bulgaria was upgraded to an importing trading company named Karelia Bulgaria Eood. After the entry of Bulgaria into the EU, the KARE brands fully responded to the challenges and excelled in consumer preferences in the country. The results so far are very positive, giving the company a high market share.
KARE is a family owned and controlled business with 90% of the shares in the hands of the Karelia family. Andrew Karelia is interviewed in more detail here. The article is a decade old but dedicates over six pages giving a good insight into the Karelia family and business.
The family are highly effective capital allocators who have increased shareholder value and dividends over the past ten years. Underpinned by a highly successful expansion programme, KARE has close to doubled it's capex spending to meet the technology upgrade in it's state of the art factory and distribution network.
The family ethos flows throughout the company and employees have consistently received bonuses.The company paid out 1.8 million Euros in bonuses for their performance in 2014.This is despite their last annual report stating that:
We are planning an extensive investment program that will enable our Company to comply with the requirements of the New Tobacco Directive, which, as of May 2016, will come into force in all EU Member States. It is unfortunate that such large investments in new machinery, worth tens of millions of Euros, will bring no added value to the Company, but are necessary solely to enable us continue the uninterrupted supply of our products to EU markets. On the other hand, the resulting added fragmentation of our production process will increase cost. In our efforts to limit these damaging effects as much as possible, we are planning the consolidation of certain production processes and raw materials in our products destined to third countries
FINANCIALS AND PERFORMANCE
Shares in Karelia have actually risen by around 60% over the past two years. Since 2010 EPS has nearly tripled. KARE's operating income, margins and dividends have all doubled. Expansion outside of Greece fuelled by an increasing capex spend has captured market share and free cash flow has significantly increased. KARE currently has €260mn of cash on the balance sheet which is approximately €100.00 a share. On a ex-cash basis investors could be paying 6-7 times earnings, dependent on FY15 results.
Tobacco companies are selling at between 18 and 30 times earnings. Tobacco is often perceived as a declining industry, but the market sees things differently, with the majority of tobacco stocks selling for around the same price as a fast growing technology company. Except where it comes to KARE who are priced at a huge discount based, primarily on fears of a Grexit. Lets remember that only 13% of revenue is from Greece, therefore any potential problems in the future will have a minimal impact on revenues. The company also keeps a significant level of cash in banks outside of Greece to avoid any mandatory banking policy which could possibly be imposed by the government.
Disclosure: Long KARE with a 2% holding