WAWEL: Bitter taste of cocoa
We initiate coverage of Wawel with a SELL rating and a FV of PLN 910.0, implying 12% downside. We believe that in the coming years rising cocoa prices will leave their mark on Wawel’s profitability. Also, its announced expansion into the jelly market might dilute margins as we think new products will be sold at a lower margin. Thus, we assume gross margin erosion to 40.2%/39.8% in 2018E/19E, respectively. As a result of switching production to the new plant, we assume savings on the SG&A side, which should partially soften the blow. Thus, in 2018E/19E we expect the EBITDA margin to be 19.4%/19.2%, respectively. Wawel is currently trading on 18E/19E P/Es in line with international peers. However, as Wawel’s activity is concentrated locally, we believe it should trade at a discount.WAWEL SA is a Poland-based confectionery manufacturer. The Company's main products are cocoa, chocolate and chocolate goods. Its products portfolio consists of chocolate tablets, assorted chocolates, filled pralines, wafers, bars, candies, pastilles, cream fudge, among others. The Company's products are sold under such brands as Michalki Zamkowe, Malaga, Tiki Taki, Kasztanki, Lekka, Mieszanka Krakowska, Raczki, Fistaszki and Kukulka. WAWEL SA distributes its products domestically through a network of 16 retail outlets, as well as abroad. The Company sells its product to chains of discount stores and megastores located in Poland including Tesco, Carrefour, Makro Cash and Carry, Real, Auchan and Biedronka. As of December 31, 2011, the Company was a 52.13%-owned subsidiary of Hosta International AG, located in Muenchenstein, Switzerland.
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