Gradus: finger lickin’ good, but not at this price (SELL – transfer of coverage)

Due to a change in analyst responsibilities, we transfer coverage of Gradus with a SELL rating and a 12M price target (PT) of BGN 0.97/share, or 30% downside. We have reflected the recent 2Q results and market trends, which have led us to believe that Gradus is headed towards a tougher 2H22E. Poultry and egg prices have plateaued at peak levels ytd but, with rising energy costs and elevated feed prices, we believe Gradus is likely to face difficulties in passing input cost inflation onto its clients further in the near term, affecting its profitability adversely (EBITDA compression of 380bps yoy in 2022E, on our estimates). Next year, we expect the core segment’s (eggs especially) performance to improve, as the company optimises its product sales mix; and, together with easing costs, we believe there is likely to be some margin normalisation to pre-pandemic levels. Moreover, at current levels, even with an improved 2023-24E outlook, the stock is overvalued, we believe. On our 12M PT of BGN 0.97/share (DCF valuation), the stock would trade at an average 2023-24E P/E of 11.4x (-30% downside to the current levels) and in line with its peers (a 2% premium). On EV/EBITDA, it would trade at average 2023-24E EV/EBITDA of 6.4x (vs. 9.6x, -33% downside to the current levels), or a 10% discount vs. its peers. Also, with a 6M ADTV of EUR 4k, the low liquidity is an issue for investors seeking exposure to the stock.