After a troublesome 2021, profit protection plans and price hikes looked set to prime the company for a return to margin expansion. Since the war in Ukraine broke out, however, the perfect storm looks to have intensified further still, with the trends from H2’21 having become enhanced. To our understanding, and supported by data from the Swedish Food Federation, cost inflation on raw materials for food manufacturers continues to accelerate. Hence, having gone from a position where it looked like the company was offsetting a large share of the cost inflation through its February ’22 price hikes, it now looks like it needs to endure further hardship until mid-Q3 when the new price hikes realise.
Industry comments
As price discussions with the food retail chains start at end-March, we note several data points indicating that food retail is facing significant price hikes. For example, Orkla’s Swedish CEO said in an interview in the financial press that he thinks prices could increase by double-digits, partly driven by the war. Given such comments from industry leaders, we would be very surprised if Midsona is unable to make major adjustments as well. Furthermore, we have noted some soft wording from ICA on the topic, indicating that regular lead times on price hikes might be shortened for local producers to allow them to stay in business. On the back of weaker purchasing power among consumers and contracting margins, we leave our sales estimates relatively unchanged while lowering EBITDA estimates by 17%-4% on ‘22e-‘24e.
Implied pricing on historical margin levels
As margins have been hit significantly in 2021 and look to come down further during 2022e, we have looked at the company’s current valuation in the context of historical margins. This exercise shows that on a fixed five-year average margin, the share is trading ...
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