Midsona - Finding a normalised profitability

Q1 report was on the soft side Sales 5% and adj. EBITDA 10% below ABGSCe We lower ’21-’23e sales & EBIT by 2% & 5% Q1 report was a surprise on the downside Midsona’s Q1 report was below our expectations, with sales of SEK 965m vs. our estimate of SEK 1,012m and FactSet cons. at SEK 1,021m.

There were a few explanations for the deviation: 1) Both we and consensus were caught off guard with the seasonality effects in System Frugt, as the total M&A contribution was SEK 106m vs. SEK 203m in Q4. We now understand that H2 is much stronger than H1 for System Frugt, with the company seeing a gradual increase in activity each quarter, with Q1 the weakest and Q4 the strongest.

2) Midsona terminated a contract of ~SEK 60m in annual sales due to unsatisfactory margins. This reduces quarterly sales by ~SEK 15m, and it explains most of our cut to sales of 2% in our forecast period. Reset profitability as we find a normalised state After a strong 2020, we got a better picture of what a more normal margin is likely to be.

The main messages from the report were: 1) The gross margin is holding up well, partly due to the terminated contract noted above. 2) Heavy marketing activity has started. ~SEK 10m in additional marketing was spent in Q1, and we should expect a similar level in Q2.

The additional marketing is in conjunction with the European roll-out. Branding efforts are always hard to spot in the financials immediately, but it should imply a good ROI in the long run, as the company is establishing itself in the region. With a better idea of what to expect for profitability after the pandemic, we lower ‘21e-‘23e EBIT by 5%.

Trading at 20-15x ‘21e-‘23e EV/EBITA On our updated estimates, the Midsona share is trading at an EV/EBITA of 20x-15x on 2021-2023 estimates. This corresponds to the share trading 11% above smaller food peers and 8% below larger peers.