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PAPOUTSANIS | Lathering towards growth

Among the largest soap manufacturers in Europe; vertical integration & expanding geographic footprint – Papoutsanis (PAP) is one of the largest soap manufacturers in Europe (and the sole in Greece), operating across four product segments, namely Own brands, Hotel amenities, Private label/Third party and Soap noodles. The company is diversified geographically generating >55% of sales abroad (mostly in Europe). The business model is based on the offering of high-quality, natural ingredient-based products at accessible prices, with a strong focus on sustainability. At the core of the model lies vertical integration, with production at the company’s state-of-the-art facilities also including product packaging and storage handling.

11% sales CAGR in 2023-26e driven by branded products and third party – After a year of contraction in sales due to a confluence of factors, we expect a return to a 2-digit growth algorithm (c11% CAGR over 2023-26e), in sync with the company’s historic track record (>20% CAGR over 2018-23). We expect the bulk of the growth to be accounted for by own branded and third-party products, with Papoutsanis: 1) increasing its share in the local soap market while making a foray in laundry/dishwashing detergents and 2) expanding its portfolio of PL/third party contracts, with mgt having indicated a new contract is underway which will contribute c€6m in sales on an annualized basis.

… and c18% EBITDA CAGR – Following a temporary setback in 2022, with EBITDA falling c17% due to input cost pressures, PAP’s profitability bounced strongly in 2023e (c31% on our estimates) with EBITDA marking an all-time high and the respective margin bouncing closer to a mid-cycle level (c15%). Looking ahead, we envisage c18% EBITDA CAGR over 2023-26e thanks to the positive pendulum of operating leverage. We expect EBITDA margins to expand c2.7ppts over the next 3 years (to 17.5%) and to reach c18.5% by 2028e. This will be in broad sync with the cross-cycle margin of EU HPC peers.

FCF inflection in light of abating capex; to pave the way for balanced capital allocation – PAP has not been very cash-generative in recent years as a result of elevated investments (€25m spent in the last 3 years) aimed at augmenting its capacity (utilization now c50%) and expanding the product portfolio. With most of the investment program completed, we expect capex to trend down to c€5-5.5m annually. As such, we believe that 2023 marked the inflection point for FCF generation, with FCF set to enter an upward trajectory paving the way for rising cash returns. Our model pencils in c35% dividend payout which we believe reflects a well-balanced approach between investing for growth and rewarding shareholders, especially considering the comfortable financial position (2023e net debt/EBITDA at 2.1x).

Valuation – The stock has had a rather lukewarm performance in the last 2 years, with the shares yet to reflect the bounce in profitability in 2023, the 2-digit growth prospects ahead and the FCF inflection. With the stock at c7.2x EV/EBITDA, namely c35% discount vs the EU HPC sector, we find the current entry point compelling. Our DCF-based valuation (9.5% WACC) generates a PT of €3.0, placing PAP at c8.6x 2024e EV/EBITDA, still >20% discount vs its peers. We thus initiate coverage with a Buy.