Swedencare: Vetting the recent M&A activity - ABG

Q2’21e preview
Swedencare will report its Q2’21 results on Thursday, 29 July. The indications from animal health peers are that the industry is continuing to show strong development. We expect the report to show strong business momentum, with organic growth of 45% and total growth of 408% (370% M&A, -7% FX). The differences from the Q1’21 report are: 1) the ~USD 1m in sales lost due to supply chain issues in Q1 are likely to reappear in Q2 and 2) additional revenues from the consolidation of Rx pharmaceuticals. This leads us to Q2 sales of SEK 163m and adj. EBIT of 42m, corresponding to a margin of 26%.

Vetio is a strong addition
We consolidate Vetio into our forecasts, explaining our estimate changes (~50% and 40% for ‘22e sales and adj. EBIT, respectively). With Vetio already the largest supplier to Stratford, the initial synergy effects come as a pure margin effect as well as higher visibility in product sourcing in parts of the US operations. In the longer term, we see potential for insourcing of the company’s other operations as well, and see Animal Pharm and Rx as the most likely initial candidates. Insourcing of Animal Pharm and Rx could generate synergies of SEK 20-25m, of which we assume ~50% will be reached by the end of 2023. Furthermore, we see that the addition of Vetio could accelerate Swedencare’s R&D efforts, as it would have access to more in-house capabilities.

Trading at an adj. EV/EBIT of 68x-40x in ‘21e-‘23e
On our updated estimates, the Swedencare share is trading at an EV/EBIT of 68x-40x for 2021-2023e. This corresponds to the share trading ~50% above a broader animal health peer group, and ~25% above Nordic ingredient brand peers, although Swedencare is growing faster through its M&A. After the Vetio acquisition, the financial targets of SEK 2bn in sales imply a sales CAGR of 23% from our 2023 estimates.

https://www.introduce.se/foretag/Swedencare/Equity-research/2021/7/swedencare---vetting-the-recent-ma-activity/