GVDBF - Givaudan SA: Wait For Valuation To Get Cheaper

2023-04-19 11:44:19 ET

Summary

• The North American market is weak due to consumer destocking and frailty, and GVDBF has relatively higher exposure to declining demand categories.
• GVDBF's strength lies in its presence in SAMEA, where it has an early entry and a robust local presence.
• Uncertainties in the short-term and GVDBF's high valuation make it difficult to recommend a buy at this time.

Summary

Givaudan SA (GVDBF) creates and sells perfumes, flavors, and fragrances made from both natural and synthetic materials. GVDBF held its Annual Investor Day after reporting 1Q23 sales results last week, which has further solidified my hold rating for the company. A major factor in my convictions is the obvious frailty of the North American consumer, especially in the lower income brackets. Along with consumer destocking, this has had a significant impact on the recent economic downturn in the region. In addition, compared to its rivals, GVDBF has relatively higher exposure to the plant-based protein and seltzer/alcoholic beverage categories, both of which are seeing declining demand. Assuming plant-based products are more expensive due to downtrading's potential effect on demand, I believe this to be the primary reason North America has underperformed, and it is difficult to underwrite any near-term recovery. However, management has stated again that they do not believe this weakness indicates a loss of market share in the region because declines appear to be uniform across its businesses. Positively, the strength of the European consumer stands in stark contrast to the North American market's weakness, and the Middle East, Latin America, and Asia all continue to show encouraging signs of growth. Givaudan reported 21% growth in F&B's Fine Fragrances in 1Q23 compared to 1Q22 on very strong market demand and some market share gains.

I find this update rather mixed and have yet to remove the uncertainty that I am seeing in the short-term. Coupling this with the high valuation that GVDBF is currently trading at (21x forward EBITDA) relative to Symrise (SYIEY) at 17x forward EBITDA which is expected to grow faster based on consensus figures. Another way to view this high valuation is that GVDBF is trading above its historical 10Y average despite this higher interest rate environment - which I argue is hard to sustain given a similar growth profile but weak near-term trend. All in all, I maintain a hold rating in the near-term until uncertainties clear and valuation becomes cheaper.

Investor Day

Even though I'm keeping my hold rating, I think the positive news from the Investor Day will help investors build a case to buy when the valuation gets cheaper. GVDBF business in SAMEA was the main topic of this year's Annual Investor Day. Management remarked that the company's early entry into the Dubai market in 2000 set it apart from its competitors and that it now considers its robust local presence to be an asset in a region characterized by robust growth, and competition is divided among several smaller players where the majority of the customer base is controlled by local and regional companies. From what I can tell, management is putting a lot of emphasis on this part of the world.

Taste and Wellbeing

In SAMEA, management has emphasized the rapid growth of local and regional competitors who are gaining market share from larger consumer-packaged-goods companies by offering more competitive prices, greater responsiveness to market needs, and a better fit with consumer preferences. The landscape is dominated by the retail channel, which consists primarily of mom-and-pop shops, with the remainder made up of the food services sector, which is considered to be a growth market. In my opinion, GVDBF's competitive positioning is supported by the company's dedication to meeting its customers' requirements, which include things like reliable supply, affordable prices, and health and wellness services. Several underlying secular trends, in my opinion, have the potential to boost demand even further. For instance, people are shifting their preferences away from conventional food kiosks and toward those that offer healthier options like sugar-free beverages and dairy alternatives. In particular to address this demand, I applaud GVDBF's plan to improve nutrition accessibility by providing more cost-effective and pre-mixed options, and to present a best-in-class product offering through constant portfolio revamping.

Fragrance and Beauty

Local and regional businesses make up 84% of the region's fragrance market, making it extremely competitive. As a result of the rising population and the subsequent demand for more cost-effective products that cater to a younger demographic, I believe there are several emerging trends in the Consumer Products industry that benefits GVDBF. For instance, I think there is a demand for cleaner labels, local products, and in the Fine Fragrances category, it is home to a rich tradition of perfume use in daily life, where originality and self-expression are highly prized. I also think GVDBF would benefit from capitalizing on the growing importance of online and social media channels as opposed to traditional fragrance retailers. That gives GVDBF a good "reason" to try out some new stuff (like different bottle sizes). As for the Active Beauty market, by capitalizing on key growth drivers like a concentration on regional customers, management expects double-digit growth for the year 2025. I think this expansion is doable by focusing on speed to market, innovating in new product categories, and catering to the market's increasing granularity through smaller formats.

Conclusion

I maintain my hold rating for GVDBF. The strength of the European consumer and growth in the Middle East, Latin America, and Asia offer encouraging signs. However, uncertainties in the short-term and GVDBF's high valuation vs peers and its historical 10 year average make it hard to sustain it in a similar growth profile but weak near-term environment, in my view. I recommend waiting for a cheaper valuation before considering a buy.

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