GR Sarantis
Does Greece and Compounder goes together?
Hello, you know maybe already by now, that I love consumer goods companies.
They resist crises and cyclicality, have nice margins and contrary to tech, pay some dividends, offering a cushion in soft markets.
They are easy to understand, you do not need to do Harvard to know the TAM of Coca Cola. But the TAM of the B2B software company in Germany …is a crucial part of the analysis. Therefore, with these consumer goods companies, I can miss some tech high flyers, but will still collect generous and steady returns.
Sarantis is one of these companies. It produces, distributes, and sells 100+ personal care brands in Greece and Eastern Europe. Own production is 70% of sales.
The segments are
Personal care 43%
Home care 45%
Health care 2%
Luxury cosmetics 10%
The Revenue is about 390 million Euros per year, which is substantial.
Greece 35%
Poland 23%
Romania 14%
The rest of Central and Eastern Europe : 28% incl. 6% Ukraine
Now how can a small company manage and develop over 100 brands, you may ask?
The answer is that it pursues an acquisition strategy and distributes for others.
But why would a small company acquire 100 brands?
Well, there is no easy answer, but the answer is that the management of the company saw that this strategy was adequate to grow shareholders returns.
Management
The management is the Sarantis Brothers, and the financial performance they had seems awesome. I have listed an interview of the CEO at the bottom of the article and it is telling their story.
Strategy
we can see in the following slide that the strategy is multiple. When looking at this strategy, we have to understand the geography of Eastern Europe. It is a highly fragmented part of the continent with multiple countries with a sub 10 million or even sub 5 million population, different languages, currencies, retailers.
So for Organic growth, you can do a lot of things. If you have a relationship with retailer 1 in country A, and you have a good brand in country B, you can introduce that brand to retailer 1. You can take what works in a country and bring it to other countries.
Acquisitions, First you have small countries, low competition, and probably low prices. You can also buy brands from divesting multinationals like PZ Cussons or Unilever. Multinationals love to sell small branches and do not worry about the price, especially ETF/blackrock owned multinationals with little regards to capital stewardship. I hate when I own a multinational and I see that the CEO just unloaded some small country brand for a bargain price. Sarantis is on the other side.
Once a brand is acquired, you can rationalise production, administrative and distribution costs with your international Eastern European network.
Strategic Partnerships.
If you are a small or big brand and you want the best local distribution in a dozen central European countries, you can do it alone. Best of luck to you with the languages and the markets. Really, good luck and have fun!
Or you can do a partnership with Sarantis, who already operate there. I know what I would do.
Financials.
That seems compelling and a high quality business.
Net debt to EBITDA is at 0.54X
The group trades at a PE ratio of 15.7 when we look at 2020.
For 2021, H1 profit was 25% higher, but 9 months was equal to 2020, showing a recent contraction in Q3, despite small revenue growth, due to “higher commodity prices and freight costs”.
Recent movements:
We had Insider buys and share repurchases by the management in the past months, so maybe it’s a good buy.
Risks:
Greece has super high debt to GDP, which is a risk
Ukraine (6% of revenue) has a risk of conflict escalation or most likely an economic squeeze by Russia by Bypassing Ukrainian Gas pipelines.
Some of these countries have terrible declining demographics. If you sell consumer products, and the consumers are less and less numerous, this is a problem.
Loss of profit that will be lost with the gradual transfer of the stake in Estee Lauder in the coming years, to the joint venture it maintains with the American multinational. Today in the joint venture, ELCA Cosmetics Ltd (ELCA), the Saranti group holds 49% and The Estee Lauder Companies 51%. This represented €11.50 mil or profit in 2020. This is very substantial.
(EL has the "right to increase its stake based on the financial statements of ELCA at June 30th 2021, June 30th 2024 and June 30th 2027 for 9%, 25% and 15% respectively.)
Short term, H2 will probably be bad after the contraction in Q3.
Opportunity:
The company could pull a transformative and cheap acquisition at any time, improving the 2022 prospects.
Conclusion
Despite flat to declining demographics, the business performs its growth strategy well and is able to produce results.
It is an excellent business model.
There is some country risk with Greece, Ukraine, the Balkans.
At the moment the company is probably not a short term buy with the coming contraction in margins and the Estee Lauder JV that will be sold progressively.
It seems a long term buy with great stewards of capital. I will be watching it closely. I do not own stock of Sarantis. I had a tracking position that I sold off as after analysing it, especially when understanding the profit contraction in Q3. Mr market may give it at a lower price. I should be more patient.
Company presentation and links
The company presentation is awesome in describing the business model.
Do not miss it, have a look https://sarantisgroup.com/media/212nawtc/corp_pres_september_21_h1_21.pdf
https://sarantisgroup.com/news/time-magazine-interview/
PS1: After receiving numerous feedback on Poulaillon and IFRS 16 Leases, I added my updated valuation and thoughts as a comment to the Poulaillon post. It is still too cheap in my opinion.
PS2: If you are French speaking, I am making a translation substack in French at bourseeurope.substack.com. As you read it this far in English, you Do not need to subscribe to the French substack, which are translated articles. But if you have French / Belgian/ Canadian/ African friends, you can give this new publication a boost by sharing. Merci
PS3: If you are curious, I am writing a new random thoughts substack. Just some observations from being a multiple times emigrant. It can be thought provoking..because I am French, and because I have been around a bit, from cozy suburbs, to infamous banlieues of Paris, Dublin, Spain and the Catalan “thing”, or Johannesburg. Posting may not be regular at all there. I feel that If I write, I cannot just write about companies, but I have a little responsibility to share more than this ! However, I want to keep the stocks substacks focused about stocks.
Thanks for reading and give me your thoughts about Sarantis or the Greek market!
Do you know what price / valuation on the L'Oreal purchase of the 9% stake of the JV?