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Sarantis | Glowing growth, margin inflection; Buy

Solid Guidance, confident message, strong Buy – Sarantis mgt laid out a solid growth trajectory, guiding for c12% organic EBIT CAGR in the 2024-28e period following +30% growth in 2024e (of which 14% organic). Driving this material profit uplift will be strong organic top line growth (5-7%) underpinned by the focus on value-accretive “hero” products, SKU rationalization, organizational improvements and further streamlining of costs. Overall, Sarantis looks headed for EBIT near €76-77m by 2026e, 2x the respective 2020 level (excl. Estee Lauder contribution) signifying a material reset to profitability. Given the 2-digit growth profile and the material cash flow generation resulting from it (since capex over 2024-28e will absorb only c25% of operating cash flow over the period on our estimates), we find the case quite compelling reiterating our high-conviction Buy rating.

Solid 2023 execution – 2023 was a transition year, following the divestment of the EL JV (mid-2022) and timeline delays regarding the completion of the Stella Pack deal. Despite these headwinds, operational execution was strong and was coupled with cost monitoring, with Sarantis growing revenues 8% (driven by price/mix) and core EBIT (namely EBIT ex EL) +46% to €47m (vs €32m in 2022), delivering 2.5pps core margin expansion (to 9.8%, a record level seen in 2020), quite a commendable performance providing the platform for future growth.

Lifting forecasts to align with the upbeat outlook – We have lifted our revenue forecasts by 2%, embracing management’s focus on growing “hero” brands. Coupled with abating input costs and opex containment, this drives a c1.7bps EBIT margin acceleration by 2026e. We thus envisage 23% yoy revenue increase in 2024 (of which c17pps from Stella pack) filtering through to a 2024e adj. EBIT of €60.8m (+29% yoy, +14% organic), in sync with guidance. Looking ahead, we pencil in c5-6% organic revenue growth in 2025-26e, coupled with slight margin accretion, which corresponds to c10% mid-term EBIT CAGR (c12% guided by mgt), far more attractive than the 7-8% CAGR offered elsewhere in the EU HPC sector.

Balance sheet optionality – Sarantis enjoys a very robust balance sheet (€44m net cash in 2023) and is set to end 2024 on a small net debt position, following the completion of the Stella Pack acquisition (just 0.1x net debt/EBITDA in 2024e). Thanks to the strong cash flow profile, Sarantis is set to return to a net cash position post 2025 thus being well-placed to retain a consistent shareholder remuneration policy (c38% payout included in our numbers), while building war chest for further M&A.

Attractive valuation – Following the material upgrades to our estimates (and a small reduction to our WACC assumption to 9.1% from 9.5% before), we raise our DCF-based PT for Sarantis to €14.5. Our PT effectively values the stock at 11.6x 12mth fwd EV/EBITDA, still some c8% discount vs EU HPC peers. With the stock at >30% discount vs the peer group while offering a superior growth profile, we argue there is plenty of room for the relative discount to close as the group scales up further and the strong growth momentum continues.