2023-12-21 08:30:00 ET
Summary
- Swedish candy company Cloetta has seen a 22.4% increase in sales in the last quarter and a 15% YoY growth in organic sales.
- Despite challenges such as sugar taxes and input inflation, Cloetta has above-average margins and profitability.
- The company's valuation metrics are close to 10-year lows, making it an attractive investment opportunity.
Dear readers/subscribers,
In this article, I discuss Swedish candy company Cloetta ( CLOEF ), noting its above-average margins and profitability despite challenges such as sugar taxes and input inflation. Despite a decline in sales during the COVID-19 pandemic, Cloetta has seen a reversal in trends, with a 22.4% increase in the last quarter alone and a 15% YoY growth in organic sales.
While I have previously upgraded my rating here, I now consider this to be even more attractive. I do not believe the market has seen how undervalued this company is for what it offers, and that the challenges faced by the company are being met and "fixed".
If you follow my work, you may remember an article I wrote years ago on a company called Cloetta. Cloetta is a Swedish candy company, though its products are sold across Scandinavia. Cloetta is actually a pretty popular company with Swedish investors, despite its relatively limited size from an international perspective.
Obviously, this is a relatively unknown stock to most of you - and I would caution you away from the ADR on this one, and focus on the native ticker on the Stockholm market.
Cloetta - Revisiting Candy
Between sugar taxes and sweeteners, investing in Candy might not be the most interesting thing for most investors at this time. However, in this article, I will argue that Cloetta fulfills some of the most important fundamental appeals that make a stock attractive for investing.
That's why I have a full percent in my commercial portfolio and am currently building to a 1-1.3% exposure in my private one.
The thing that makes the company attractive here is twofold.
First, even with margins slightly lower this year, this company is an above-average business in profitability KPIs. Gross, EBIT, and net margins are all solid. By solid I mean that they manage a 4-5% net margin, which in foods is great. The company has a relatively good set of fundamentals and balance sheets. In terms of valuation, in fact, most of the company's valuation KPIs are close to the 10-year lows. More on that later.
The company's decline in operating and gross margins have to do with production - and these headwinds are being "fixed", likely with upsides next year already.
The business model looks like this.
As you can see, Cloetta divides its business into two segments branded and pick & mix. The latter is a very Scandinavian sort of concept which I have not often seen abroad, where you pick your candy mix similar to how you might pick fruits or vegetables.
On the fundamental side, the company has been working continually to lower its debt and improve both revenue and sales. While showing a somewhat flattish development for the past decade, I believe the stock has reached an inflection point in terms of valuation, tracing below just a native SEK18/share.
First of all, the company actually trades in direct opposition to where it is expected to go in earnings. Earnings are expected to go up, 15% annually until 2025E. Despite this, the company is now at less than 11x P/E, which means that a current yield comes to almost 5.6%. This is above average for the sector, and above average for the company.
The company, despite its valuation, also only has long-term debt at 30% of capital, and in its latest quarterly report, the 3Q23 reported very impressive trends.
What do I mean by impressive trends?
- Strong double-digit organic growth in branded.
- Strong double-digit organic growth in pick-and-mix.
- Better operating profit due to cost control and pricing, offsetting input increases.
- An improving, optimized portfolio, and its new production assets on plan in terms of timing.
- A net debt/EBITDA below the target of 2.5x.
Sales are looking like this.
The one factor that's still a bit of an issue is SG&A increases driven by salary and inflation as well as FX - however, every other factor is, as I see it, moving in the right direction for this company.
The new Greenfield project is a bit of a linchpin for the company's change here - and the current expectation is for the permit to be received in 2024, planned investment in 2025, and plant start in late 2026. This is a multi-year 5%+ yielding investment that will eventually, I believe, pay not only dividends through straight dividends but also see increases in valuation moving as high as SEK35-40/share, meaning triple-digit growth.
Unrealistic, you might say?
the company was at such levels, and above, around 7-8 years ago - these are not unrealistic developments provided the company executes well.
The company is also moving forward with its strategy both in the UK...
...but also in terms of ingredients. The company's target is a 90% vegan share by 2030 with 33% of the portfolio already moved there as of 2023. To those who don't know the company, this business owns the market-leading candies in Sweden and Scandinavia, including the #1 candy brand nationwide.
It's also a company that, at this point, has over 150 years of history, is represented in 50 nations, and produces candy in 7 factories. Some of its more popular brands, which are extremely well-known here include Läkerol, Cloetta, Candyking, Jenkki, Kexchoklad, Malaco, Sportlife, and Red Band. A good comparative proxy in NA would be Yum! Brands ( YUM ) or Hershey ( HSY ).
The company has seen a recovery in its profitability since COVID-19, but not a recovery in valuation - rather, the market has punished this company further, despite these improved fundamentals across the entire board.
There are risks to this company - but these are as I see it, controllable.
Risks & Upside
The main risk I view with Cloetta is input pricing. I've raised this point earlier but this is the key indicator that I would keep an eye on. There is also energy pricing, and as this goes down, more profit should be possible. However, in countering these risks, we've seen the company able to raise pricing and through this move its margins upward. The changes to its portfolio and production with Greenfield over the long term will do things to lower the risk profile of the company.
The company has also made it clear that further price hikes going into 2024 are unlikely, given that inflation even here is slowly cooling down.
The upside for Cloetta is far easier here. Because the company is being traded below 11x P/E, I don't see much of a downside possibility for the long term here. Add to this that we have a 5%+ yield with a relatively good level of safety given the company's estimated earnings, and what risks do remain are mostly macro-related.
I move to valuation to clarify what I see, why I invest, and what you can expect when investing in Cloetta here.
Cloetta Valuation - There is a Significant Upside Here
I consider Cloetta to be excessively undervalued here.
This is because I view the company as fairly valued or attractive at or below 15x P/E, and the company's current valuation implies an average weighted P/E of 10.8, despite a forecasted growth rate in the double digits for 2023-2025 when prices for energy and raw materials normalize.
This also includes company streamlining.
What you see here expresses well, I believe, the current valuation for the company and why I believe it to be illogical. Even if you do not believe in any premiumization for the company, despite the fact that this 17-19x P/E premiumization is in fact established over 15 years at 19.38x, then this company has over a 70% total RoR upside to a 15x P/E.
To a premiumization recovery, that upside looks as follows until 2025E.
I do not believe a long-term price target close to SEK40 to be unrealistic if the company delivers on its targets, meaning that I do consider a 100%+ TSR to be entirely possible here.
In my last article, I made a case for a SEK25 short-term PT, which I maintain at this time - but I want to state clearly that I believe the eventual result may go higher, and therefore this target is subject to change when I see things improving (and if the company manages this).
Other analysts give the company a target range starting at 19 and going to SEK27, but only 3 analysts follow the company. This makes estimating or using analyst averages difficult, as the company is undercovered. An average here is SEK22, with a " buy " rating and a 22% upside - but again, very few analysts here to look at.
If you follow my work, you may be familiar with my approach for investing. If necessary, I am willing to wait years for a company to reach a level I will consider investable. And that is the way I believe that everyone should act when investing in stocks. Do not let yourself be stressed - and 3 years certainly is not allowing me to be stressed. Cloetta has been favorable for some time but is now growing more and more favorable as the specific upside for the company is becoming clearer.
The Worst Thing That Can be Said for Cloetta
That Gross and Operating margins as of 2022 were in decline - and there were reasons for this that are turning around as of this year. Every single fundamental KPI related to valuation is at multi-year lows, without the profit-related valuation for such a downturn. PB, P/E, P/S, and yields - all are at situations that imply a significant upside here.
I view Cloetta as being of high value and very good valuation here and give it the following thesis.
Thesis
- Cloetta is one of the largest candy companies in Scandinavia. It has an entrenched market position, with many customer favorites and Pick and mix trends being favorable to Cloetta. Since most of the comps aren't publicly traded, I would view Cloetta as very favorable in this context.
- The valuation for Cloetta was not favorable during the last time I reviewed it. That changed in July of 2023, and this caused me to change my PT and expectations for Cloetta.
- I now expect Cloetta to manage a 70% upside to a PT of SEK29-30 in 2025-2026E, based on a 15x P/E and an EPS growth of 14%. The company yields an impressive 5%.
- I give Cloetta a PT of at least SEK25 for the short term.
- That means the company is now a " buy " for me, and it remains so during December of 2023. I have significantly expanded on my position in Cloetta, and intend to continue doing so.
Remember, I'm all about:
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative and well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
This means that the company fulfills every single one of my criteria, making it relatively clear why I view it as a " buy " here.
Thank you for reading.
This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
For further details see:
Cloetta: Christmas Candy For Your Portfolio