It will be interesting to see in a little over a week who has been selling and buying. Unless, of course, these are key trades made by those in nominee accounts.
It looks like there is a desire to keep the share price at 14 euros, as the seller is not pushing the price any lower.
I’ve had to chew over the latest interim report a bit. There is still no cause for celebration, but things are moving along more or less as talked about. I’ve spent a lot of time pondering Sonae’s motives for acquiring Musti at 26 euros per share and what kind of scenario they used in their modeling. Just for the hell of it, I calculated averages for various figures across their entire time on the stock exchange to get some perspective on their worldview. I’ve also tried looking for comments in Portuguese sources, but so far the investment has received very little criticism. Musti is, after all, the single largest investment they’ve made, even if it doesn’t shake their overall business. Still, questions are bound to start arising at some point if the profitability story doesn’t straighten out alongside growth. Of course, with low trading volume, the share price doesn’t matter to them at all as long as the story progresses as desired. I warn against stock populism and all other assumptions. This thought experiment is pretty rough, but I think it gives a decent ballpark for Sonae’s mindset.
Before Sonae got involved, and partly during their time as well, the ratio of fixed costs to revenue has been quite precisely 29%. Now it has risen to about 32.5%, which practically translates to an annual extra cost of around 20 million euros at the current revenue level. According to management, costs have been increased in order to better meet the demands of growth, and thus top-line growth will restore the previous profitability level. In itself, this is a quite credible story.
Another interesting figure is, of course, the gross margin %, which on a 12-month rolling basis is 44.4%, somewhat below the stock exchange era average (45%). Musti’s strategy aims at developing the sales mix and thereby improving the gross margin %. In other words, increasing the sales of private labels and services are key factors in boosting the gross margin %. There are certainly strong views within the company regarding the gross margin % potential, but for my part, I will settle for using 45% in my assumptions, which is one percentage point below the corona-era average and the stock exchange era average. I believe that regarding this, Sonae and the company management can see significant potential.
The ratio of lease liability payments to revenue has risen steadily from 5.5% to 6.2%. It is quite possible that they will rise to some extent in the future as well if locations need more space for services, which of course makes them somewhat more expensive. Let’s therefore assume a longer-term average of about 7% of revenue.
If one were to scope out the current market’s growth potential up to 2035, i.e., the next 9 years, a scenario of around 1100 million in revenue is not entirely pulled out of thin air. I didn’t bother digging up any estimates of the market size in value, as freely available estimates are very vague. I will therefore settle for using a rough estimate of the number of dogs and cats in cross-market comparisons, while also factoring in the general purchasing power of the respective regions. Let’s consider Finland a mature market, and growth for such a market is often suggested to be around 3-4%. I am therefore largely mirroring other markets against Finland, especially since market leadership is also very clear there. It should be noted that Sweden and Norway are higher than Finland in terms of general purchasing power, while the Baltics and Portugal are not. In practice, this means that in terms of value, Sweden and Norway should be assigned a small positive multiplier relative to Finland, whereas in the Baltics and Portugal, consumption per pet is certainly lower. Using Claude, I dug up the total number of cats and dogs in each country and got the following figures: Portugal about 4 million, Sweden about 2.7 million, Finland about 1.9 million, Norway about 1.5 million, Lithuania about 1.2 million, Latvia about 0.7 million, and Estonia about 0.5 million. The figures are, of course, very rough due to statistical uncertainty, but they give a direction for market sizes.
Finland’s business will generate around 200 million in revenue this year, and assuming it is a mature market with an average growth of 3.5%, revenue in 2035 would be around 275 million. In my opinion, this should be very achievable, especially since consumer purse strings have generally been tight at the starting level.
Sweden will also generate roughly 200 million for the company this year, and it should be noted that Sweden is a 1.5x larger market in terms of cats and dogs relative to Finland, so over the course of 9 years, Musti should have the opportunity to grow within the market as well. Sweden’s growth could indeed be sketched as considerably higher, and with an average growth of 8-9%, the 2035 revenue would be just over 400 million. In that case, Musti’s revenue there would be exactly 1.5x relative to Finland. Considering Sweden’s better purchasing power, this sounds very reasonable. It should also be noted that the latest news regarding ICA reinforces confidence in ArkenZoo’s competitiveness in Sweden.
Norway will see Musti generate around 100 million in revenue this year, and there should definitely be growth left. However, Norway is pretty much the exact same size market as Finland when adjusted for the number of pets and better purchasing power. Similar to Sweden, market share is thus there to be won, and growth has indeed been strong early this year. Assuming an average growth of 10-11%, Norway’s revenue in 2035 would be around 240 million euros. Which would start to be closer to Finland’s equivalent, so this also sounds quite reasonable.Finally comes the challenging part, namely the Baltics + Portugal, along with any potential new market entries. Let’s leave new entries strictly as an option and as a buffer for potential errors in the growth assumptions of current markets. For example, the company could aim to gain some foothold in the market from Denmark, Poland, the Netherlands, the Czech Republic, or even Spain. The problem in many of these is competition, as players like Maxi Zoo (owned by Fressnapf) are strong operators. More on that later. In the Baltics, there are indeed almost as many pets as in Sweden, but consumption per pet will not reach Nordic levels even by the end of our forecast period, despite them being partly growing economies. Let’s assume the Baltics combined to be a clearly smaller market than Finland, say around half of Finland. Portugal has a huge number of animals, but much the same applies to purchasing power as in the Baltics. Thus, the market could be, for example, about the size of Finland or somewhat smaller. In any case, combined they should be slightly larger than Finland and naturally grow at a faster pace in the coming years. Total revenue this year will be around 70-75 million, and with, say, 12-13% growth, the combined revenue would be just over 200 million in 2035. That sounds quite realistic relative to Finland, assuming that equally high market share would not be achieved and the combined markets would nonetheless be clearly larger than Finland at that time. Of course, Portugal is Sonae’s home turf, so there’s no telling what tricks they might come up with.
The scenarios presented above are pure back-of-the-envelope estimates and are based on a very positive assumption regarding Musti’s competitiveness within each market. That is, in Finland, growth follows the market and the current competitive position is maintained. In Sweden, the market grows slightly better while the position is improved to some extent. In Norway, the Baltics, and Portugal, the assumption includes strong market growth and clear market share expansion. However, relative to Finland’s revenue and position, the scenario seems quite feasible in all of them. Thus, total revenue would be around 1,100 million euros in 2035. If we assume a gross margin of 45%, as stated at the beginning of the text, the gross profit would accumulate to about 500 million. And if the ratio of fixed costs were around 29%, the EBITDA would be about 180 million, which would mean a 16.5% margin. That would sound reasonably sensible, since before the growth investments brought along by Sonae, the adjusted EBITDA % has been 16.5%-17.5%. If lease liability payments were in line with the 7% discussed at the beginning, they would accumulate to about 75 million per year, so cash flow from operations would be somewhat over 100 million. Loan repayments and taxes will take a couple of tens of millions and investments another similar amount, so the free cash flow distributable to owners would be in the ballpark of 70 million with these assumptions. If we think of a valuation of some 8-10x EBITDA or 20x FCF, which could be quite justified for an internationally operating and to some extent still growing retail business, the EV would hover somewhere around 1,500 million euros. Net debt would be a hundred million or a couple, but it wouldn’t change the big picture much, so the share price would be in the class of 45 euros.
I believe that a scenario of this kind has been tossed around on Sonae’s end, because when offering 26 euros per share, their annual return hovers around 10%, taking into account value development and cash flows from that period. Of course, buying now at the share price of 14 euros, the investor’s return could be really strong, as in value appreciation alone we would be talking about 3x, so factoring just this in, the annual return turns out to be 12.5-13.5%. In addition to this, it is likely that in a few years the upfront growth investments will also level off relative to sales and cash flow will start accumulating in the bank account as well. Sonae will likely want to distribute this too, and this could add a few percentage points to the annual return. So we would be talking about an expected return of over 15%. Finally, regarding the aforementioned Fressnapf, it must be said that they are a fierce operator as well. Growth is accumulating and this year revenue might already break 4 billion, with the EBIT margin hovering around 10% (EBITDA margin around Musti’s peak levels). Musti is therefore truly the little brother, and entering new markets can be really challenging if Fressnapf’s stores are waiting on the other side. In itself, however, it provides a positive example of the industry’s potential. Hopefully, Musti’s winning streak will thus continue on its home turf.
Interview with the Fressnapf CEO from April: Interview with the Group CEO of Fressnapf | Maxi Zoo - GlobalPETS
He previously worked at Tesco. He touched on many of the same points as Rönnberg, such as lifecycle thinking in customer relationships, meaning they don’t just fixate on a single sales channel. Loyalty programs are important, and the expertise of in-store staff is key. Competition in Germany is intensifying as Zooplus, Amazon, and hardware stores challenge them more and more. Growth is visible in countries such as Austria, Switzerland, Poland, and Hungary. According to his comments, they are focusing only on their 15 current markets, and no expansions are on the horizon.
All the selling came from nominee-registered accounts. It looks like they have found new homes in many different places; shares at 14 euros have been well-received.