Robertet (4)

A global leader in natural fragrances, flavors and ingredients. Part 4: Recent operating performance and valuation.

A resilient operating performance in a complex environment

If anyone still had any doubt about Robertet’s resilience, the company’s operating performance in 2020 provided a resounding reassurance on its ability to navigate a crisis.

Although the pandemic and its consequences strongly impacted fine fragrances amongst other sectors, Robertet managed to keep its revenues stable at €538m at constant exchange rates (-2.9% at actual exchange rates). It grew its EBITDA 2.3% from €94.3m to €96.5m through stringent expense management while also benefitting from lower raw material prices. The FCF generation was high at €86m resulting in a net cash position of €64m as of 12/2020.

2021 is off to a slow start with revenues down 3.1% yoy in Q1 but the management still expects a revenue growth of 5% for the full year at constant exchange rates.

A valuation reflecting Robertet’s uniqueness in an attractive industry

With a LTM PE of 45 and an EV/EBITDA of ca. 25, Robertet is clearly not what any student of classic Graham and Dodd value investing would call a cheap stock or a bargain!

Future sustained growth is imperative to justify the current valuation but highly achievable.

Based on its 2020 financial statements, Robertet has a FCF yield of ca. 4%. We could discuss at length whether 2020 was a “normal” year in terms of FCF generation but we believe it certainly was a “maintenance” one! On paper such a valuation does not provide a significant margin of safety though. One could even say the stock is priced for perfection as the company must grow its profits at least 6% p.a. for a long period of time in order to generate a double digit return for its most patient investors (the annualized return of an investment over the very long term, i.e. at least 10-20 years, tending to match its starting FCF yield + growth).

After studying the company for quite a while, our take is that Robertet should be able to meet its target of doubling its revenues (and profits) over the next 10 years (7% p.a. CAGR) and grow at a fairly fast clip beyond that horizon. The ingredient/fragrance market is expected to continue to grow at a 4% annualized rate while Robertet’s competitors (IFF, Symrise and Givaudan) all mention a 5-7% organic growth target for the next few years in their presentations, which is also consistent with the forecasted increase for the “naturals” segment of their businesses. Robertet’s strong balance sheet also positions the company ideally to make acquisitions that could easily add at least 2% of incremental growth annually.

The underlying naturals market momentum should be long-lasting and potentially accelerate as consumers’ appetite for healthier, organic and natural food, cosmetics and nutrition further develop, especially in Asia. Robertet’s excellent performance in this region and in its Health & Beauty (H&B) division in 2020 is testament to this structural trend. The upside still remains huge for the H&B division’s active ingredients as it accounted for only 1% of total sales vs. 27%, 36% and 36% for the raw materials, fragrance and flavors divisions, respectively.

Finally, Robertet has a demonstrated track record of growing both sales and net income at an annualized 7-8% over the past 16 years. This is not a guarantee of future success but still provides significant comfort as to its proven ability to pull off such a feat.

Valuation multiples are rich but consistent with similar transactions and competitors’. Robertet could even command a 30% premium in a combination with Givaudan.

Another way of assessing Robertet’s valuation is to look at how much an educated and informed buyer would be prepared to pay if the Mauberts were eager to sell. The answer is quite straight forward. In 2017, Givaudan acquired Naturex for a total consideration of €1.4bn at 24x its LTM EV/EBITDA. IFF struck back in 2018 with the acquisition of Frutarom for $7.1Bn and a multiple of 26x. It is important to keep in mind these businesses, unlike Robertet, were not 100% positioned on naturals (Frutarom derived 70% of its revenues from this segment).

At 25x, Robertet’s current EV/EBITDA is the average of both transactions. It is also in line with the multiple of Symrise but well below those of Givaudan and IFF which stand at 33x and 37x, respectively. Givaudan accepting to pay as dearly as its own multiple (i.e. a 30% premium over Robertet’s valuation as of today) to acquire a franchise with a strong moat is not so far-fetched (and even less factoring in potential synergies).

In hindsight, it could even be argued that both Firmenich and, to a lesser extent, Givaudan, had a pretty good deal when they purchased Robertet’s shares between €700 and €900. Firmenich is also believed to have paid the same price for both the investment certificates (CI) and the ordinary shares while the former, based on past research, should command a discount of at least 12% vs. the latter due to the absence of voting rights.

As of today, the average weighted share price (taking into account both the CI at €913 and the ordinary share at €983) is €979 (for a market cap. of ca. €2.4bn). Although we are usually not keen on buying shares of companies at such high multiples, Robertet’s uniqueness, know-how, prospects and the scarcity of similar companies in a resilient and predictable industry support the current valuation. The caveat is you need to be prepared to hold for decades (which is fine with us).

Ideally, the savvy investor would wait for a pull back of the share price in the €700-900 range to buy a combination of CI and ordinary shares. The only question then is whether we might see such prices again any time soon…

Disclaimer: The above article constitutes the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – we hold a position in Robertet at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).