EUR 300.00 For Business Accounts Only

Sarantis | Premium growth, premium valuation

Solid 9M’20 points to upside in FY20 consensus – Sarantis’s robust set of 9-month results mark a year with solid profit momentum, driven by operating leverage, favorable mix and cost containment (benefiting profit from core operations), which seem to have more than offset the pressure witnessed in Estee Lauder. As such, we upgrade our FY20e EBIT forecasts by some 7%, eyeing EBIT growth of +19% yoy in the full year, conservatively implying -3% yoy in Q4’20 EBIT. This seems more than feasible notwithstanding the accelerating second wave of the virus. As such, we expect consensus EBIT estimates of €49m to edge higher closer to our €52m forecast.

High teens EBIT growth in 2020e; prospects looking forward remain intact – Covid-induced shifting consumer habits towards hygiene/cleaning products have benefited Sarantis in the short term, along with other HPC sector companies. In the current backdrop, we expect scale benefits and product mix changes to manifest themselves in a 200bps reduction in the opex/sales ratio in FY20e and a 20bps expansion in the gross margin, counterbalancing the expected weakness from EL JV profit in the current year. This should translate to >25% growth in direct EBIT (excl. the Estee Lauder JV) in the current year, or c19% yoy growth in group EBIT. 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 c11% 3-year EBIT CAGR (2020-23e) for the standalone business, quite a solid growth profile among EU peers. We believe Sarantis’s healthy balance sheet, strong distribution channel 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 attributes largely priced-in – We reiterate our positive structural view given the merits of the thesis. Having said that, on our estimates the core business 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 stick to our Hold rating as we consider positive attributes to be largely priced-in, especially in the light of the 2nd wave of the outbreak which may put pressure on consumer spending next year.

Valuation – Our PT is based on a DCF of the core business 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. Following the 9M results, we have raised our FY20e EBIT c7% but have made limited changes thereafter. Accordingly, we have lifted our PT to €8.8 per share, estimating the JV stake’s value at c€1.0 per share.