da Intermonte – FINEFOODS Company Research Report

Buon pomeriggio,

di seguito e in allegato inviamo il company research report relativo a FINEFOODS a cura di Intermonte.

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Un caro saluto,                                      
Diana Avendano Grassini

M. +39 3381313854

Business Recovery Well On Track Thanks to Management Actions

• 3Q/9M results at a glance: 9M results were 1%/2% better on the top line/adj. EBITDA, confirming a steady business recovery for Fine Foods as a result of strengthening R&D, marketing, and commercial activities, but also of the timely and effective cost cutting actions implemented by management. The top line stood at €152.8mn in 9M, with the YoY trend improving (9M: +5.5% YoY of which 1Q: -1.1%, 2Q: +3.1%, 3Q: +15.6%), still supported by very strong trends in Pharma (9M: +42% YoY of which 1Q: +19%, 2Q: +49%, 3Q: +31%) leading to €40.0mn revenues in 9M (26% of total sales), exceeding FY21 turnover (€38.3mn) in just 9 months. Cosmetics (9M22: €26.5mn) benefitted from the Euro Cosmetic (EC) consolidation (from 4Q21): on a pro-forma basis organic growth was 8.5%, driven by the integration of the two companies. On the other hand, Food (9M: €86.4mn -19% YoY, 57% of sales) saw similar trends as 1H (-22.5% YoY) hit by shrinking output for markets affected by the Russia-Ukraine war and the slowdown of clients’ activities in Multilevel Marketing, resulting in an anticyclical downturn in sales in the post-Covid recovery.

• Focus on profitability. Adj. EBITDA reached €12.6mn in 9M (8.2% margin), due to the supply chain crisis and the significant increase in energy costs (€5.4mn in 9M, 3.5% of sales; 1% in 9M21) in 3Q in particular (€2.6mn, 5% of sales). Excluding energy cost increases, the adj. EBITDA margin was 12% in 3Q and 10.8% in 9M22, closer to historical levels. In 3Q, the material and energy cost increases were further shared with customers, while the impact of production downtime was reduced due to efficient stock management. The net loss (-€11.6mn) increased due to a €3.2mn write off of a financial receivable related to a claim against former EC shareholders. Indeed, following an expert opinion, FF was granted a reimbursement of €3.5mn for purchase price adjustment out of the € 6.7mn originally requested; FF is considering further action to recover the claim in its entirety. On the other hand, we had already captured the negative mark-to[1]market change in FV (€-7.9mn, non-cash item) related to the parent company’s equity securities. Net debt was marginally better at €46.8m, with further WC absorption in 3Q related to the rise in trade receivables and inventories due to raw material and packaging procurement issues.

• More reassuring short-term outlook: management is optimistic about the outlook for the coming months and the ongoing improvement of critical supply chain issues, leveraging on: a) strengthening R&D, marketing and sales activities and implementing continuous improvement projects; b) integration and developments in the Cosmetics BU to bring further opportunities; c) policies for inventory management and for recharging the cost of raw and packaging materials; d) energy efficiencies from the 2 photovoltaic systems from 4Q onwards.

• Updated estimates. At this early stage, we are virtually confirming our FY22-24 top line estimates (although with a better mix of Pharma and Cosmetics vs. Food), while for this year below EBITDA we capture the €3.2mn write off of the financial receivable. 2023-24 adj. EPS +0.8%/+0.5%.

• OUTPERFORM confirmed; target still €12.0. Our DCF model leads us to confirm our €12.0 TP. Despite the complete unpredictability of energy cost trends, we appreciate the effectiveness of the turnaround strategy undertaken so far and management’s confidence in the short/medium[1]term outlook thanks in part to the continuing improvement of supply chain problems: this prompts us to confirm our positive rating. Fine Foods is well placed to outperform peers, having largely outgrown its core end-markets in the last decade, and enjoys solid operating trends by leveraging its critical mass as the largest Italian CDMO, highly visible customer demand (resulting in enduring relations and increasing share of wallet), and the additional capacity secured through investments, as well as the ability to seize further M&A opportunities for quality assets in adjacent markets or to act as a natural aggregator.