Newlat Food SpA investment thesis

Newlat Food SpA $NWL.MI FY22 Results

Introduction to Newlat

Newlat Food Group is an Italian-based multinational food company that specializes in the production and distribution of a diverse range of food products, including pasta, milk products, bakery products, dairy products, and instant noodles, among others. Founded in 2004 and headquartered in Milan, Newlat has expanded its presence across Europe, particularly in Italy, Germany, and the United Kingdom. The company went public on the Milan Stock Exchange (Borsa Italiana) in October 2019, and as of December 2022, it boasts a market capitalization of approximately €186 million.

Newlat’s growth strategy centers around both organic growth and acquisitions, enabling it to diversify its product portfolio and strengthen its position in the European food industry. The company operates 16 production plants across Europe. Newlat is dedicated to providing consumers with a wide variety of food options. Its product range includes well-known brands such as Giglio, Birkel, and Delverde, which have become staples in European households.

Newlat FY22 Results

In 2022, Newlat Food Group faced significant challenges amidst a difficult economic climate characterized by inflationary pressures, market volatility, and geopolitical instability. Despite these hurdles, the company managed to report higher consolidated revenues of €741.1 million, an increase of 18.5% compared to the previous year’s revenues of €625.2 million. While the increase in revenues can be partly attributed to the inflationary context, it is essential to note that the company’s diversified product portfolio and strong market presence played a vital role in driving growth across all product categories, with pasta, milk products, and bakery products leading the way.

However, the inflationary environment had a notable impact on the company’s margins. Newlat’s consolidated EBITDA amounted to €56.4 million, up 2.6% compared to the previous year’s €55 million, with a 7.6% margin. Adjusted EBITDA reached €57.7 million, with a 7.8% margin. These figures reveal that the company’s cost of goods and services increased at a faster rate than the price adjustments it implemented for its clients, resulting in compressed margins. Despite these challenges, Newlat demonstrated resilience by maintaining profitability amid market uncertainties. Consolidated EBIT stood at €20.1 million, while consolidated net income was €6.6 million. The company’s free cash flow (excluding net working capital impact) amounted to €16.8 million, with a cash conversion rate of 72.6%. The proforma consolidated net financial position as of December 31, 2022, was €-81.4 million, reflecting the company’s solid financial standing and providing a strong foundation for future growth.

The FY22 results highlight the impact of inflation on Newlat’s net working capital (NWC) and cash conversion cycle. To mitigate potential shortages and lock in favorable prices, Newlat increased inventory levels and allowed higher receivables to help customers manage the steep increase in average selling prices. This led to a shortened cash conversion cycle, with adjustments in payment terms for both customers and suppliers. NWC should normalise in 2023 (as it is happening) compared to the negative impact experienced in 2022.

In FY22, Newlat also achieved the acquisition of EM Foods, which marks the company’s entry into the French market and the dessert mix segment. This acquisition expands Newlat’s geographical footprint and enhances its product portfolio while providing access to development opportunities (It seems that it is going to absorb a part of the Unilever contract)

Newlat Food SpA FY22 results

Newlat Outlook 2023

Newlat’s outlook for 2023 is cautiously optimistic, as the company navigates a dynamic market environment. However, we believe that the information regarding the first two months of 2023 have been the most positive information of all contained in the Newlat FY22 results. These two first months of 2023 have marked a good sales volume increase in all the main business units of the Group, in particular:

  • +15% in the milk segment
  • +5% in dairy
  • +25% in pasta
  • +40% in bakery
  • +15% in instant noodles

Based on the first two months of the year, the company has already seen a double-digit increase in turnover (+23.5%) and a significant improvement in EBITDA Margin (9.45% compared to 7.6% in 2022). 

This sets the stage for a strong performance throughout the rest of the year. Key elements contributing to the margin recovery include lower costs of electricity and wheat, reduced supply chain disruptions, and increased prices to customers.

Regarding potential acquisitions, Newlat Food is currently involved in several significant sale processes. The first target is a foreign company with a turnover exceeding €1 billion and various business divisions complementary to Newlat’s current portfolio. This acquisition would allow the Group to surpass €2 billion in consolidated turnover and become one of the most important players in the European food industry. The second target is a company with a leading brand in the “special products” category, which would consolidate Newlat’s position in specific product categories.

In addition, the Group is still engaged in the sale process concerning the operations of a large European MNC with a product category complementary to Newlat’s existing portfolio, which began in 2022. These processes and target profiles highlight the Group’s determination and ambition to focus on growth and value creation while navigating the ongoing global economic uncertainties.

Our thoughts about Newlat after FY22 results

Reflecting on Newlat ‘s FY22 results, the 19.3% increase in revenues is noteworthy, but it must be considered within the context of an inflationary environment. The company continued its M&A program, acquiring strategic assets to strengthen its market position and expand its product portfolio. Despite margin compression due to rising input costs, Newlat demonstrated resilience by focusing on growth and strategic initiatives.

As for the outlook for 2023 and beyond, Newlat has shown promising signs in the first two months of the year, with a 23% increase in turnover and a significant improvement in the EBITDA margin (9.45% compared to 7.8% in 2022). This suggests that the company might be moving past the worst of its challenges and could see a recovery in margins.

Regarding the two potential M&A targets, the ambitious €1 billion revenue acquisition presents substantial risks, especially in the current economic environment. Although Newlat has existing debt agreements with low-interest rates, pursuing such a large acquisition would likely require additional debt financing or a capital increase. At the current share price, the value proposition of a capital increase for the company and its shareholders is uncertain.

Conversely, the second acquisition target, with €200 million in revenue, appears to be a more attractive option. This smaller acquisition may be easier to integrate and could offer a more manageable risk profile. However, more information is needed to fully assess the potential benefits and risks associated with both acquisition opportunities.

In conclusion, we are optimistic about Newlat’s prospects for 2023, we expect a margin recovery this year as cost are being passed to customers and electricity and wheat prices have diminished considerably. However, we will keep a close eye on the company’s acquisition strategy, particularly the transformative acquisition, as it could entail significant risks that need to be carefully managed and mitigated.

Did you enjoy the article? You would help us a lot if you like / share the article on the web / social media. It takes a few seconds and the impact is huge for us. Thank you

Disclaimer: We have direct long exposure to Newlat Food SpA shares

Note: Every week we publish investment thesis, macroeconomic articles and comment the market situation in the recently launched blog section. You can follow us to receive an email each Sunday with the publications of the week. 

As always, thank you for reading

Newlat Food SpA Investment thesis $NWL.MI

Investment theses about Italian companies like Newlat Food SpA $NWL.MI