Friday Morning Coffee Nr 159 - The candy is getting out of the bag

The Swedish confectionery maker Cloetta with a strong portfolio of local brands in chocolate products, chewing gum and pick & mix concepts in the Nordics, the Netherlands, and for some of the brands even across Europe posted strong first half results. Meanwhile, as the company is operationally sound, it also set high ESG standards for itself which investors and humans, we can only appreciate. Although we could write many pages on the efforts made, we would like to at least mention one example which is that Cloetta applies the Farmer Connect platform to ensure farmers are paid directly and fairly which helps alleviating poverty and child labour.

 As you recall, we like to invest in undervalued quality companies with solid balance sheets and market positions. Therefore, we really appreciate to see a portfolio company’s true earnings power unfolding. While the market this earnings season at times responded quite temperamentally to earnings announcements, be it up or down, the surge in the Cloetta share price into the second half of the year, was justified. In fact, we believe it was long overdue, considering that the company’s ongoing efficiency improvements are taking Cloetta’s earnings power to higher levels. That bodes well for the share price development going forward, as Free Cash Flow yield is still generously above 6% (please compare that to what you get on your savings account!) and yet the ongoing efficiency measures target to improve earnings power even further.

On top of that, Cloetta stand to benefit from a full reopening in the Nordics as the market leader in Pick & Mix, see picture on the right-hand side in one of the large Scandinavian Supermarket retailers. The concept is indeed a popular tradition in the Nordics, however, not only in the supermarkets, but it has also given the tradition to mix a candy back when at the cinema. The loyalty towards it, is the strong local brands enabling the business to generate 3-4 times more cash flow than it needs to run the operation.

The headwinds faced a couple of years ago, appears now to turn into tailwind, since the stock has moved from depressed share price levels, trading at a significant discount compared to larger peers like Mondelez, Lindt or Barry Callebaut. 

We hope Cloetta will enter a period where it will continue to experience a rerating of a brilliant company with a great portfolio of strong local brands whose shares, we happened to buy while it was discounted.

Despite the difficult pandemic, we are convinced the consumer will continue to eat candy be it at the cinema or streaming movies at home.

I wish you a nice weekend and do not forget to spoil yourself with a candy bag,

Karsten

Important notice: This document is published for information purposes only and gives the opinion of the author at the time of the publication. It does not constitute an offer to buy or sell financial instruments or investment advice and does not confirm any transaction unless expressly agreed otherwise.