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Sarantis | Cost challenges vs accretive M&A

Muted growth in 2022 as costs bite – Following a solid 2020, Sarantis had a tough 2021 characterized by slowing top line momentum and contracting margin (EBIT margins -120bps) posting a 6% decline in operating profits as costs started to bite. 2022 looks quite challenging as well, as input cost inflation stays elevated continuing to put pressure on gross margins. We have thus lowered our 2022e EBIT estimates c6% envisaging that the c11% COGS inflation will be offset by price/mix and cost monitoring but will result in just marginal EBIT growth yoy.

2023 bolstered by Stella Pack acquisition – Sarantis has announced an agreement to acquire Stella Pack, a Polish household products brand, with the deal pending regulatory approvals. The business generates sales of €65m, with an EBITDA margin near 12%, indicating EBITDA of c€8m, while potential synergies should be near €2m. The addition of Stella Pack in our 2023 forecasts explains the small upgrade to our 2023-24 numbers, as its contribution more than offsets the underlying downgrade. We estimate the EPS accretion at c10% corresponding to an incremental value near c€50m (€0.7 per share).

Post 2024: return to the 8-10% annual EBIT growth algorithm – Inflation has pushed cost curves higher, and, on that basis, costs look set to stay elevated in 2023. This explains our assumption for a further mild gross margin erosion next year which offsets the positive contribution from corporate action. Post the consolidation of Stella, we model 5-6% annual top line growth translating into c8-10% EBIT growth through to 2026e, with margins gradually returning to 12% after troughing at 11% in 2023e.

Positive LT structural view remains intact – Sarantis enjoys a healthy balance sheet (0.1x net debt/EBITDA) ending FY’21 with net debt of just €6m having delivered FCF of c€21m in a challenging year despite elevated capex (c€30m). Among key merits, we identify Sarantis’s diversified geographic mix, balanced category exposure, mgt strong track record and innovative ability and history of value-accretive M&A. All these are factors underpinning our positive structural long-term view.

Valuation – Our SOTP valuation returns a €7.8/share PT (down from €8.7 previously), as the impact from the underlying downgrade to our numbers is partly offset by the value creation from Stella Pack. The stock has derated markedly in recent months, trading not far from its pre-pandemic levels, owing to concerns around the near-term outlook due to the inflationary pressures and recessionary worries. At current price levels, Sarantis’s core operations are valued at c40% discount vs peers, which is a bit higher than the historic 35% average, mainly due to the aforementioned risks. Overall, we prefer to stay on the sidelines, attaching a Hold rating to the stock, as although we are confident on the long-term merits of the case, we do not see significant upside in the short-term taking into account the subdued near-term earnings momentum.