EUR 150.00 For Business Accounts Only

Sarantis | First thoughts: 9M EBIT 7% above our estimates; upside risk to FY20e

Solid 9M’20 underpins FY20e – Sarantis has released a robust set of results for the 9-months, with accelerating top line trends in Q3 underpinning continuation of the profit momentum. Overall, 9M’20 EBIT registered 33% yoy growth, 7% above our forecasts, with the respective margin up c2.5pp yoy. More specifically, Greece 9M’20 revenues grew by a significant 12.4% yoy (incl. a c.7% contribution from the Coty agreement) and international markets registered 4.7% yoy growth (or -1.8% yoy on a like-for-like basis, i.e. excluding Luksja). Group revenues grew 7.4% yoy in the 9M to €286.5m. Of note, 9M income from Estee Lauder was down 13% yoy on our estimates (implying almost half last year’s income in Q3). As such, 9M’20 EBIT growth stemmed from core operations, which grew a hefty 52% yoy. As for Q3’20, group sales increased by c9% yoy (up from +6.7% in H1), with Greece +10% yoy and international +8% yoy. EBIT growth decelerated sequentially in Q3 (+21% vs. 42% in H1) but this was expected, given the marketing costs’ phasing in the post-lockdown period (and new acquisition costs). Overall, risk for FY20 estimates lies on the upside we think, as our FY20e EBIT (similar to consensus) implies a rather conservative c23% yoy decline in Q4’20.

Prospects intact, 2-digit EBIT CAGR in the next 3 years – Covid-induced shifting consumer habits towards hygiene/cleaning products have benefited Sarantis in the short term, along with other HPC sector companies. As a result, risk for FY20 lies on the upside. Looking forward, prospects remain intact by virtue of Sarantis’s balanced category exposure (both aspirational and functional) and its diverse geographic footprint, with the group well placed to deliver c.6-7% organic sales growth and EBIT growth in the low teens in the coming years. Overall, our numbers envisage c.15% 3-year EBIT CAGR for the standalone business, quite a solid growth profile among EU peers. We believe Sarantis’s healthy balance sheet and low leverage also enable it to exploit opportunities that may arise in the aftermath of the coronavirus epidemic (e.g. M&A) and to drive further long-term growth.

Positive structural view but valuation looks full – We reiterate our positive structural view given the merits of the thesis. Having said that, the stock trades at c.30% 2021e EV/EBITDA discount vs. EU peers, a level we consider fair as we argue this discount is justified by factors such as Sarantis’s smaller size, inferior margins and lower brand equity. We thus believe that the current price already reflects the merits of the thesis. As such, we stick to our Hold given the balance between risk and return in the current backdrop of fragile consumer sentiment in the light of the 2nd wave of the outbreak which may put pressure on spending next year.

Valuation – Our PT is based on a DCF of the core business (at 9% WACC) to which we add the value of the EL JV assuming EL will exercise its call options, with Sarantis’s stake gradually phased-out until 2027.