EUR 300.00 For Business Accounts Only

Sarantis | Room to grow

In our new note we reiterate our view that Sarantis is well-placed to continue delivering 6-7% organic sales growth through to 2021e underpinned by the healthy macroeconomic outlook across its geographic territories (sales-weighted GDP growth >3%), its balanced category exposure (both aspirational and functional) and its leading market position in many of its product categories. This will translate into c12% EBIT CAGR in the next 3 years by virtue of positive operating leverage, scale benefits and acquisition-related synergies. We stress that Sarantis’s c7% organic growth in 2019e places Sarantis among the highest-growth companies in the broad HPC sector. Our 2019e forecasts (EBIT €46.2m, +14% yoy) are slightly ahead of management guidance.

With Sarantis’s JV with Estee Lauder (EL) being a key profit contributor during the entire past decade (consistently accounting for >20% of group EBIT) but being based on a shareholder agreement that expires in 2021, we have decided to recalibrate our valuation methodology to explicitly incorporate the non-renewal scenario. In our note we argue that although a potential end of the JV agreement would deprive Sarantis of a significant source of income, it would not compromise the thesis. Under the scenario of the shareholder agreement not being extended, we would expect the gap to be covered by M&A (or new distribution agreements), with the required M&A-revenue uplift near €50-60m on our numbers. We estimate that such an acquisition(s) could be funded with the proceeds from the potential EL shareholding disposal. Sarantis’s historic M&A track record bolsters our confidence that mgt will proceed to value-accretive deals to replace the EL JV, if this agreement were indeed to conclude in 2021.