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Equity Report

Swiss Water Decaffeinated Coffee

Note – Our investment thesis was realized before we were able to publish this article. Despite that, we still wanted to share our research. Attached is our summary and report on the Swiss Water Decaffeinated Coffee company. We believe this company is trading slightly above fair value, our recommendation is now SELL

Summary

Swiss Water Decaffeinated Coffee, headquartered in Burnaby, BC, owns and operates a coffee decaffeination facility. Swiss Water decaffeinates and processes green coffee beans for specialty roaster retailers, specialty coffee importers, and commercial coffee roasters throughout Canada, the U.S. and select regions in Europe, earning revenue primarily on a contract basis. Customers often lack the capital requirements or vertical integration to decaffeinate coffee beans in-house and have benefited from outsourcing the decaffeination process in both cost efficiencies and more focus towards core competencies. Swiss Water relies on its “Swiss Water” decaffeination method to remove caffeine from beans, largely relying on the solubility of water and osmosis. However, Swiss Water’s method offers such marginalized benefits to customers, despite being more wasteful and expensive, to the extent of raising environmental concerns. Additionally, management has failed to execute on growth opportunities, has a grotesque record of capital allocation and is highly overpaid relative to peers with an evident focus on short term objectives. Despite recent struggles that have turned the business cash flow negative and have pushed returns into the gutter, Swiss Water has refinanced, taking out high-interest loans, to maintain their dividend benchmark, levering the business from 1X to 7X EBITDA in the process. This has led to the initiation of coverage of Swiss Water with a SHORT recommendation at a target price of $2.51.

See the full report here