EUR 300.00 For Business Accounts Only

Sarantis | Balanced valuation, with quality proposition priced-in

9M’21 performance stalls, weighed by Q3… – Sarantis’ 9M trends showcased a decelerating Q3 demand pace, on rising costs, while also cycling a strong Q3’20. Specifically, Q3 EBIT was down 18.5% yoy, on sales growth of 1% yoy, driven by 2.4% yoy revenue growth in Greece and 0.3% yoy in foreign markets. Despite easing of lockdown restrictions and an open selective channel, profitability was tepid owing to an uptick in opex, product mix changes and rising cogs pressure. Overall, in the 9 months performance stalled with EBIT +0.2% yoy at €36.3m.

…with soft momentum set to continue in Q4’21 and early 2022… – Looking ahead, we see similar trends in Q4, as a result of continuing high input costs and increased opex. As such, we see a lower than previously expected 2021e EBIT margin of +12% (earlier forecast for 13.3%) on sales growth of +4% yoy (earlier forecast for +6%), in sync with mgt’s updated view. For FY’22 we believe margin pressures will continue throughout H1, though supported by restored demand trends with gradual pick-up during H2’22. Overall, we see c6% yoy FY’22 revenue growth, with the EBIT margin down to 11.7%, in part reflecting further gross margin erosion and assumed cost investments to propel top line growth, on top of a slightly lower profit from EL of €11m (vs. previous €12m).

… thereby driving profit downgrades – Overall, we have lowered our 2021-22e sales and EBITDA 3-5% and 10-15% respectively, on account of weaker price/mix and gross margin erosion given inflationary pressures. We note that we expect group organic sales growth to trail revenue-weighted GDP growth in both 2021 and 2022, following the strong 2020 performance.

Positive structural view remains intact; M&A optionality – We believe that the balanced category exposure and the diverse geographic footprint will underpin mid-teens EBIT growth post 2022, with the group well placed to deliver once again c.6-7% organic sales growth in the mid-term. Overall, our numbers envisage c16% 2022-2025e EBIT CAGR for the standalone business, quite a solid growth profile among EU peers. As we believe Sarantis is likely to exploit M&A opportunities in its effort to drive further LT growth, we have examined the potential impact from a hypothetical acquisition to the tune of c€35-40m, with EV/EBITDA post synergies at c5x. We estimate that such an acquisition could result in some c11% EPS accretion to our group forecasts post 2022.

Valuation – We continue to value Sarantis with a sum of the parts of the standalone business and the value of the EL JV. We treat the latter as a limited-life business, with Sarantis’ stake gradually phased-out until 2027. Our 12-month PT is lowered to €8.7/share (from €9.2 previously), driven by the short-term profitability downgrade. With Sarantis’ core operations valued at c21% discount vs peers, we find the current valuation fair, especially taking into account the lack of concrete short-term catalysts. However, as margin expansion rolls out, we see upside potential.