Huhtamäki - Packs food and milkshakes

Stocks
697

I don’t own Huhtamäki shares, but I have thoroughly scrutinized the company a couple of times with potential ownership and valuation in mind.

Huhtamäki has gradually improved its operations, offers broad diversification with its global reach, and with a stable company, one can sleep peacefully at night. Many like the ever-growing dividend. Compared to the average pricing of the 2020s, it could now be bought from the discount bin :slight_smile:

But I haven’t bought it, and this is also, and especially, related to two clusters of issues that were not presented in the otherwise excellent video.

In earlier times, Huhtamäki’s relatively strong position in the US market could have been considered a strength. Almost half of the bottom line, profit from the North American segment. However, there is now a double challenge in the market: political risk and K-shaped consumers.

The White House’s incessant messes, subjugating the FED to Trump’s servant, reckless indebtedness, regulatory chaos with overnight decrees, goals to dilute the dollar’s value, etc. The political risk meter in Huhtamäki’s core market is elevated, and there’s no telling what tomorrow brings.

Among US consumers, a steady change is underway on the K-curve. A small elite group is getting even richer, and the majority of the population has livelihood problems. Even if the thin upper elite frequented McDonald’s 3 times more, that wouldn’t compensate for the majority’s relatively or even absolutely worsening position as consumers.

In my scrutiny of the company, I also noted the minuscule commitment of its board members to Huhtamäki. Printing out their owned shares might cover a sauna bench, but not much more. So, do they not have faith in the company? Furthermore, if Huhtamäki’s capital allocation is so optimal, as @Antti_Viljakainen states in the video, and the share price is in the discount bin, then why hasn’t it bought back its own shares? “There is money”

A good company, not expensive compared to its history, but, but…

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698

Traditionally, Huhtamäki has allocated its capital especially to organic growth investments, steady dividend growth, and occasionally also to acquisitions. Indeed, over the past year or so, more room for maneuver has started to accumulate on the balance sheet, as net debt/EBITDA has gradually drifted towards the lower end of the target range (2x-3x). Share buybacks have been discussed in several analyst calls, and if I recall correctly (@Kristian_Tammela can supplement/clarify), Ralf/Thomas have responded that the company is considering options, even though the leverage drifting to the lower end of the target level doesn’t create any acute hurry or money burning a hole in the pocket. I would assume, however, that during the next year (possibly even in connection with the financial statements), the company will present some new plans regarding capital allocation.

In my opinion, share buybacks would be a very good option for capital allocation at the current share price level, although I do believe that they will stick to the slowly growing dividend. There could be room for both, considering the balance sheet situation and the fact that capital expenditure on organic investments has been tightened (rightly so, as the investment pace has been high in recent years and not all investments are yielding yet and/or capacity is not full). The wild card is, of course, those acquisitions and inorganic growth, which I understand are also being sought. However, assessing the latent opportunities in these and their opportunity cost relative to, for example, share buybacks is quite difficult in advance without knowing the details. It is certainly clear that the melting of one’s own multiples limits the room for maneuver and payment capacity on the acquisition front to some extent, even if the deals were financed with debt.

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699

Hi! Excellent question and a timely theme! Following the change of our CEO in January, we have stated that all measures to support value creation are on the table.

As background, we have reduced our leverage to the target range of 2-3x (net debt/comparable EBITDA). With this support, we also managed to improve our credit rating to “investment grade” this year, which should help with financing costs in the long run. The conditions for reasonably good cash flow also exist, as we have reduced investments. Regarding cash flow, the biggest question (with our business model) is always the change in working capital, especially fluctuations in raw material prices.

In capital allocation, the top priority is growth, both organic and through acquisitions. We are actively looking for targets, but at the same time with a very disciplined approach regarding price. We have increased dividends for 16 consecutive years now, so the growth is starting to have a value of its own. We have stated that we aim for a dividend payout ratio of 40-50%, and for last year we were at 44%, so there is still room for maneuver in that regard. We do not rule out share buybacks, but growth is important. Regarding acquisitions, there is always uncertainty about whether they will materialize, which is the biggest question mark regarding the implementation of capital allocation.

I hope this helps!

/Kristian

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I think now would be a good time for buybacks, considering the share price and target prices along with the company’s quality, type, and situation.

Rather than just buying when the party is in full swing and the peak cycle earnings are discounted for the next hundred years.

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701

Huhtamäki has generally done its job as well as can be expected in the prevailing market situation. The dividend is developing well and indebtedness is on a downward trend.

I would give a clean bill of health to the analysts who have been on the “add” side for a long time, because the decline in valuation levels cannot be priced to continue forever.

Often it sounds like people are more worried about the share price development than the business. This is naturally completely pointless if other things are handled properly and in an upward direction. The company will continue to have good, bad, and steady times regarding share price development.

Consider the years 2010-2016, for example; the company’s value multiplied (10e—40e).
Huhtamäki’s dividend in 2016 was 0.73e per share, and in a few years, it will be double that. So, with one share, you now get significantly more value than, say, 10 years ago.

I’ve also noticed that share prices and company CEOs don’t call your phone to tell you when they are on sale. You have to be patient and trust that things will normalize in the long run.

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Hi. I have also been pondering the reason for this “downward trend”. As one possibility, I have been thinking about the EU’s new Packaging and Packaging Waste Regulation, where one aspect is the transition from single-use packaging to reusable packaging. The regulation has already entered into force, and the transition period ends in the autumn of next year. Although the regulation focuses on reducing plastic packaging and minimizing its role in the market, it also sets targets for takeaway food products regarding the transition to so-called reusable packaging, i.e., packaging intended for multiple uses. A couple of points from the new directive: “Consumers should always have the option to purchase takeaway food and beverages in reusable packaging or their own containers under conditions at least as favorable as those offered for food and beverages in single-use packaging” and “Economic operators selling takeaway food or beverages should offer consumers the option to purchase food or beverages in their own containers as well as the option to purchase food and beverages in reusable packaging”. I don’t know how much this will be reflected in the competition within the packaging industry and the development of demand in the EU region in the coming years.

Opinions?

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Huhtamaki’s opinion is that the packaging regulation is a good thing.

The company now needs some kind of positive pulse for the share price to wake up. A large & sensible acquisition, a substantial share buyback program on top of the dividend, an improvement in the situation of the main market USA, etc.

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While I was putting together some Christmas gift Legos to pass the time, I noticed that the plastic bags inside the Lego box are changing to cardboard packaging in the future. That would be a great opportunity for Huhtamäki… well, maybe the packaging manufacturer has already been selected through a tender process.

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I think there have been paper inner bags for maybe about a year now…? At least the ones I’ve come across. I didn’t think to check the manufacturer’s mark, because I didn’t have my Huhtis (Huhtamäki) glasses on back then (yet). But overall, a good development :+1:t2:

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OP raises its target price to 39.00 (prev. 35.00) in its earnings preview and reiterates BUY.

The headline says a bit: “Next up along with the peer group”

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Kurssien ja niiden muutosten kyselyt, kauhistelut ja hehkuttelut (Osa 4)
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There is no guarantee for the future, but the consensus of all analysts is BUY :money_mouth_face:

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Here are Antti’s preview comments as Huhtamäki reports its Q4 results on Friday :slight_smile:

We expect Huhtamäki’s performance at the end of the year to have followed the sideways trend that characterized the whole year, where consumer caution has kept volume growth tight. Huhtamäki will likely provide abstract guidance once again, and the comments may not yet show clear signs of the operating environment picking up in the early part of the year. In our and consensus estimates, the company will continue its dividend hike streak with a slight increase (2025e: dividend €1.12 / share).

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