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Papoutsanis | Foaming up margins

Branded product focus + positive leverage + abating capex = FCF inflection; Buy – Papoutsanis (PAP) is one of the largest soap manufacturers in Europe (and the sole in Greece), operating across four product segments (Own brands, Hotel amenities, PL/Third party and Soap noodles). The company’s strategic focus on its own brands (e.g. newly launched environmentally friendly detergents) helps reduce the impact of sales fluctuations tied to third-party reliance in the other segments and will underpin margins in the coming years. At the same time, PAP is seeking new partnerships in the Third-Party category, which remains the backbone of its business and should help bolster sales momentum in H2. Profit margins have improved following the completion of PAP’s investment program, with operating leverage and economies of scale likely to drive further margin accretion by 2028e (EBITDA margin >17% by 2027-28e). Most importantly, with the investment program largely complete, capex looks poised to drop to c€5m annually, thus leading to a FCF inflection from 2024e and improving returns on capital. These will be coupled with a relatively compelling dividend policy (c32-33% payout) also underpinned by the solid financial position (2024e net debt/EBITDA at 1.5x). We thus reiterate our Buy rating.

Tepid H1’24 top line but expected sequential acceleration in H2’24 – H1’24 revenue came in at €32.2m (-1.4% yoy), mainly as a result of a -7.2% decline in Q1 followed by a positive trend in Q2 (+3.9%). Effectively, the strong performance in the own brand (+20%) and soap noodles (+6%) categories were more than offset by declines in hotel amenities (-17%) and PL/third-party sales (-9%), which were lapping tough comps. On the positive side, gross margins rose to 38.1%, up 6ppts yoy, driven by lower raw material costs, optimization of production, and an improved sales mix. As a result, EBITDA increased 17% yoy (c€0.8m higher) with the respective margin increasing 2.5pps to 15.9%. Despite the lukewarm top line performance in H1, we expect stronger trends in H2 as PL/third-party sales accelerate supported by a new multinational partnership, with full benefits to be seen in 2025.

2-digit growth in 2025-26e – Looking further out, the business looks set for a return to a 2-digit growth algorithm in the next couple of years on market share gains and expansion of its product portfolio (e.g. entrance in laundry/dishwashing detergents through the recently acquired ARKADI) along with new PL/Third party agreements. At EBITDA level, we expect low teens growth thanks to the positive pendulum of operating leverage, as a result of which we see EBITDA margins expanding 2.6ppts over the next 4 years (to c17.5%), aligning with EU HPC peers' cross-cycle margins.

Valuation: maintaining our PT of €3.0, keeping Buy – We slightly trim our EBITDA estimates for the following years, by just c€0.4m, recalibrating our model for top line, gross margins and opex. Rolling forward our valuation to Sep 2025, we keep our PT unchanged at €3.0. Our valuation places PAP at c8.8x 2024e EV/EBITDA, still some25% discount vs its peers. With the stock at c7.1x EV/EBITDA, namely c35% discount vs the EU HPC sector, we find the current entry point compelling, retaining our Buy.